With economic growth picking up and the U.S. Federal Reserve thinking about raising interest rates in June, an economic collapse seems like an alien concept right now. But if you take a look at one indicator, there could be a huge problem in the U.S. economy and a 2008-like economic collapse might not be that far away.
If you paid any attention at all to the last financial crisis, you’d have heard the term “subprime mortgages.” Indeed, giving mortgages to those who cannot afford them is a recipe for disaster. While the U.S. economic recovery seems to be well underway, our loan officers might have made another mistake.
The Board of Governors of the Federal Reserve System released its charge-off and delinquency rates data on loans and leases at commercial banks for the first quarter of 2016. In it, there is a big warning sign for the U.S. economy. (Source: “Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks,” Board of Governors of the Federal Reserve System, May 18, 2016.)
Last time, the culprit was real estate mortgages. This time, it could be commercial and industrial loans.
Since hitting a low of $11.7 billion in the fourth quarter of 2014, delinquencies of commercial and industrial loans at all commercial banks have skyrocketed. In a little over a year, delinquencies increased by a staggering 137% to $27.8 billion.
To put it in perspective, at $27.8 billion, delinquencies of commercial and industrial loans is actually higher than it was in the third quarter of 2008.
There’s more bad news. Commercial and industrial loans are not the only ones having problems these days. Now, even farmers might be struggling to make their payments.
In the first quarter of 2016, delinquencies of agricultural loans totaled $1.05 billion. While that number doesn’t look like much on its own, note that in the third quarter of 2015, the amount was just $505 million. So in two quarters, delinquencies of agricultural loans at commercial banks have almost doubled.
It’s not just the agricultural loans that are affected, though; farmland loans saw a spike in delinquencies as well. From the third quarter of 2015 to the first quarter of 2016, delinquencies of farmland loans surged 37% from $1.20 billion to $1.64 billion.
Don’t forget, delinquencies don’t make up the full picture. When a loan borrower fails to make their payment after a specified time, the delinquency is moved to the default category. And defaults would be a story on their own.
U.S. Economic Collapse Coming Soon?
According to the minutes of the latest Federal Reserve meeting, an increase in the federal funds rate is a real possibility at the June Federal Open Market Committee (FOMC) meeting. (Source: “Minutes of the Federal Open Market Committee,” Board of Governors of the Federal Reserve System, May 18, 2016.)
As we have seen from the latest delinquency data on several types of loans at commercial banks, things might not be going that smoothly for a lot of borrowers and ultimately for the lenders. It’s highly uncertain whether the U.S. economy could handle another interest rate increase. And if not, brace yourself for a possible U.S. economic collapse.