Recent US industrial output weakness is judged here to be partly due to a downswing in the Kitchin stockbuilding cycle – firms are cutting production to clear an overhang of inventories. Data on banks’ commercial and industrial (C&I) loans are consistent with this story.
The three economic cycles – stockbuilding, business investment and housing – each drive an associated credit cycle. The stockbuilding cycle shows up in C&I loans, which play a key role in financing inventories.
Three-month growth of C&I loans surged at end-2018, consistent with strong stockbuilding in the fourth-quarter GDP accounts. Growth, however, fell sharply through April, with loans contracting in the latest month – see first chart.
The second chart shows the contribution of stockbuilding to annual GDP growth along with the annual change in three-month C&I loan momentum. The C&I loan series is quarterly, with numbers referring to the final month of each quarter except for the last data point, which is for April. The suggestion from the C&I loan data is that the stocks cycle is now acting as a significant drag on economic expansion.