Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 01 March 2018 at 10:49 GMT

Credit Impulse Update: Warning signs for the US economy – #SaxoStrats

Head of Macro Analysis / Saxo Bank
  • The US economy continues to expand but warning signs are popping up
  • Two of three key US economic drivers have turned negative
  • Lower credit generation is happening at a pivotal moment for the US economy
New York
 The sun still shines on the US economy, but for how long more? Image: Shutterstock

The following is a new monthly publication from Saxo Bank covering the credit impulse. 
It will be published on the first trading day of every month.

By Christopher Dembik

The US expansion, which started in 2009 when the then Fed chair, Ben Bernanke, noticed “green-shoots”, is one of the oldest on record. Assuming that we make it to July 2018 (which is highly certain), the current expansion will be nine years old. That said, warning signs are popping up here and there, indicating that the economy is losing momentum. 

Two of three key drivers of the US economy are negative: credit impulse (which represents the flow of new credit issued by the private sector in % of GDP) and profit impulse (calculated as net value added minus compensation of employees).
cycle impulses
Chart explanation: Credit impulse is calculated based on the flow of loans from the domestic nonfinancial sector on a quarterly basis, then a second derivative is calculated and finally expressed as a percentage of GDP. Capital impulse represents net fixed investments in % of GDP. Profit impulse is the net value added minus compensation of employees expressed in % of GDP.

US credit impulse, which leads the real economy by nine to 12 months, has been in contraction since Q3 2017. It was running at 0.4% of GDP in Q2 and by Q3 it has fallen to minus 0.7% of GDP. The magnitude of this negative impulse is not comparable with the decline observed after Lehman Brothers but the signs are still worrying. The recent negative trend could be confirmed on March 8 with the release of data about the flow of funds from domestic nonfinancial sectors for Q4 2017 by the Fed. The slowdown is also visible in demand for C&I loans which has declined over the past quarters to 1.6% YoY in Q4 2017 versus 5.4% YoY in Q4 2016 on the back of tightening standards on loans and monetary policy normalisation.
loans and leases
In a highly leveraged economy like the United States, credit is a key determinant of growth. In coming quarters, lower credit generation will translate into lower demand and lower private investment, thought it might be partially mitigated by Trump’s tax reform. There is a high 0.70 correlation out of one between US credit impulse and private fixed investment and a significant 0.60 correlation out of one between credit impulse and final domestic demand.
credit impulse vs final domestic demand
Lower credit generation is happening at a pivotal moment for the US economy since the risk of downturn in the industrial cycle has increased over the past six months. US manufacturing, known as an efficient coincident indicator of the industrial earnings cycle, has certainly already reached a peak in the cycle. It hit a 13-year high in September 2017 at 60.2 and since then it has slightly decreased to 59.1 in January of this year.

US industrial cycle
The combination of contraction in US credit impulse, lower but not yet negative C&I loans growth, and the risk of yield curve inversion are clear signs that the United States is close to the end of the cycle. So far, these indicators have not yet reached levels associated with a recessionary risk but they validate the scenario of an upcoming economic slowdown that could be worsened when the lagged effect of decline in China's credit impulse since last year will also impact global growth.  
impulses vs yield curve
 — Edited by Clare MacCarthy
Christopher Dembik is head of macro analysis at Saxo Bank

ekom ekom
not yet
O.Rivers O.Rivers
Hello Christopher,
Could you please help me with the calculation of the Credit Impulse? I thought it is simply the change in credit growth:
Credit = Total Credit to Private Non-Financial Sector, GDP = Gross Domestic Product, t = Period
Credit Impulse = (Credit_t0-Credit_t1)/GDP_t0 - (Credit_t 1-Credit_t 2)/GDP_t 1
That is obviously different then your approach. Saxobank’s definition of the Credit Impulse is:
“To calculate Credit Impulse, we use the variation of the stock of loans held by the non-financial private sector (Nonfinancial Corporations and Households & NPISH) on a quarterly basis and we calculate a second derivative, which is finally expressed as percentage of GDP.”
How exactly do you calculate the Credit Impulse?
I would be very happy if you could help me understanding your work better.


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