MaxedOutMama

Simply put, credit cycles are fluctuations in loan quality and quantity. They are often correlated with, but not always identical to, business cycles, which are based on fluctuations in the overall output of goods and services.
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So, is the credit cycle merely a reflection of the general business cycle, or is it a phenomenon unto itself? Clearly, looking at quantity and ex-post quality measures, such as charge-offs, the credit cycle in recent decades has tracked the economic cycle fairly closely. However, many observers of the credit cycle throughout history believed that credit extension and contraction drive business activity, rather than the other way around.

The economics profession has recently begun to reconsider the role of psychology and expectations in investment decisions. Recent research has found that underwriting standards, as measured by the Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices, are a better determinant of future business lending than either GDP or the federal funds rate.23 Similarly, analysis of a Federal Deposit Insurance Corporation survey of underwriting standards finds that underwriting standards are an important determinant of future loan losses.24 A modern theoretical response to this finding might be that credit markets are efficient and that loan officers, having just as good access to GDP and interest rate numbers as anyone else, should make decisions that incorporate all available information in a rational, profit-maximizing way. Another interpretation from a 19th-century perspective might describe the easing and tightening of standards as the reflection of alternate swings between “greed and fear.”25

Was reading a link from someone elses post about some secondary markets to profit from in the housing bust. It got me thinking about some of my own experience with different suppliers to the housing market and the numbers do strongly support the end of the housing ATM.

I work with an Advertising Agency as a search engine marketer for several major national home improvement franchises (among several other companies). They span from driveway paving, to window coverings, to kitchen remodling, to floor coverings. Basically everything people have been sucking cash out of their homes to buy over the past 5 years with reckless abandon.

I've had the ability to track exactly how much demand there is for these types of products and how often this traffic converts into actual business for the client. Without much exageration, I can report that the level of both interest and sales are crashing quickly. While the level of interest is a slower decline, sales conversions have declined quite quickly in the last 5-6 months.

From speaking directly with some of the clients, they have admitted that other online efforts have been declining just as quickly. It would seem that the pain of the slow reduction in "easy" credit along with flattening/dropping equity levels is already hitting these secondary home improvement companies.

SHILLING: The economy is slowing, and I suspect that by the end of the year it could very well be in recession. The basic reason is that housing activity is weakening, and that has been the mainstay of consumer spending, which in turn has been propelling the economy. During the past 17 quarters of expansion, spending growth has exceeded income growth by 2.5 percentage points on average, on an annualized basis. And housing is what has been supporting that, with people pulling money out of housing by home equity loans or refinancing.
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Once consumers see that housing price appreciation is no longer the order of the day, then they are going to curb their spending, as they basically have no alternative. Construction and mortgage brokerage and all of what is related to it has accounted for about a third of the job creation so far in this expansion.
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One is that business investment [in software and hardware] has already been quite strong. If you look at the last couple of years, it has been growing at about a 10.5-percent annual rate. That's not markedly different than the 12.5-percent growth rate back in the late 1990s, during what was clearly an overblown capital-spending boom. So the first point is that in investment spending, the growth hasn't been all that weak.

The second point is, what do you do for an encore? You still have a lot of excess capacity left over from the late 1990s boom. My favorite example is fiber optic capacity. At the bottom, 3 percent of the existing capacity that was put in place in the late 1990s was being used, and now the figure is only about 5 percent of capacity. This is admittedly an extreme case, but there's a lot of capacity left over. So how much can you expect investment to grow from here to really spur the economy? Moreover, to make up for the consumer spending component I cited earlier, investment would have to grow at a 30-percent annual rate, and that is just not in the cards. So this idea of capital spending rescuing the consumer is not realistic.
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When you look at capital spending, you have got to see the motivation for it. Profit growth is one motivator, no question about it.