A research note from Moody’s suggests that based on an analysis of aggregate measures of corporate credit quality, the current business cycle in the US is in its latter stage. As a result, recession may be unavoidable.
They say the outlook for the credit cycle is likely to deteriorate, barring improved showings by cash flows and profit, where enhanced prospects for the latter two metrics depend largely on a sufficient rejuvenation of business sales. Their analysis suggests that recessions materialise within 12 months of the yearlong ratio of internal funds to corporate debt descending to 19.1% in Q1-2008, Q1-2000 and Q4-1989. As derived from the Federal Reserve’s Financial Accounts for the US, or the Flow of Funds, the moving yearlong ratio of internal funds to corporate debt for US none-financial corporations has eased from Q2-2011’s current cycle high of 25.4% to the 19.1% of Q1-2016.
They say, “if revenue growth does not quicken appreciably, internal funds will continue to lag debt and recession may be avoidable. Given the now mature phase of the current upturn, an enhancement of credit quality requires simultaneous accelerations of revenues and cash flows. By itself, slower growth by corporate debt may not be enough to extend the upturn”.
The same data series for China would be very interesting.