74 Finance & economics The EconomistOctober 12th 2019
2 possibility that pmc is not an outlier. India
has around 1,500 co-operative banks, ac-
counting for 8% of bank deposits and 11% of
assets—a small but by no means insignifi-
cant share.
And then there are the non-bank finan-
cial companies (nbfcs). These make loans
but do not have the same obligations as
banks to tie up a hefty chunk of their capi-
tal with the rbiand in “priority lending”
(meaning to agriculture and a range of gov-
ernment-endorsed activities). As a result,
they have become essential to everything
from auto to consumer to company fi-
nance. According to a study by bcg, a con-
sultancy, the nbfcs account for 55-60% of
first-time borrowers.
But nbfcs also suffer from a handicap
compared with banks: they are forbidden
from raising funds through ordinary de-
posits. The solution that lenders elsewhere
would naturally turn to—issuing bonds
with maturities of a decade or more—is
rarely used in India. Instead nbfcs fund
themselves with short-term loans from
mutual funds and—oddly—banks.
This mismatch between short-term
funding and long-term obligations is in-
herently unstable. And in 2018 it came tum-
bling down when il&fs, a large nbfc, went
bust, making it harder for other nbfcs to
raise funds. Many are now struggling. In
June one of the largest, Dewan Housing Fi-
nance Corporation, run by Rakesh Wadha-
wan’s nephews, defaulted on a loan, trig-
gering a $12bn bankruptcy. On September
12th Altico Capital, a smaller property-fi-
nance company, defaulted too. Many more
are at risk.
As credit growth has slowed, India’s
broader economy is feeling the effects.
Manufacturing and retail are showing
signs of strain. Construction is going
through a particularly torrid time. Big cit-
ies are littered with frozen projects. One fi-
nancier in central Mumbai with a particu-
larly panoramic view can count 35
skyscrapers on which work has halted—
and with it, any hope that the lenders be-
hind them will be fully repaid. 7Something goes bumpSource: Datastream from RefinitivIndian banks, share prices
May 1st 2019=100May Jun Jul Aug Sep Oct
2019859095100105110F
inancial marketshave seen several
episodes of panic since early 2018, often
triggered by developments in President
Donald Trump’s trade war with China. And
in recent months, indicators of economic
activity in America have begun to lose mo-
mentum. The worst figures are in manu-
facturing. Growth in the sector almost halt-
ed over the summer. Industrial production
declined in July, according to the Federal
Reserve, and in September the ism-Chicago
Business Survey, another closely watched
indicator, hit its lowest level since 2009.
Jobs figures published on October 4th
showed a decline of 2,000 jobs in manufac-
turing between August and September. In
parts of America’s industrial heartland, in-
cluding midwestern states such as Indiana
and Michigan, which helped carry Mr
Trump to victory in 2016, the hiring slump
has been pronounced.
Industry is a politically resonant sector.
But more than 90% of Americans work in
other parts of the economy, in particular
services. What happens next depends on
whether the weakness in manufacturing
spreads. So far it has not. Private employers
added a net 358,000 jobs in the third quar-
ter, down from 527,000 during the same
period a year earlier, but still well in posi-
tive territory. The unemployment rate,
meanwhile, fell to 3.5%, the lowest since
December 1969.
Consumer spending is the engine of
American growth, and petrol aplenty re-
mains in the tank. Personal consumption
grew at an annualised rate of 4.6% in the
second quarter of 2019, more than compen-
sating for declining investment and ex-
ports. Household debt remains relatively
low and incomes are growing.
But here too there are spotty indications
of trouble. In September an index of ser-
vice-sector activity showed signs of a slow-
down, and growth in new business was the
weakest since the index began in 2009.
After stripping out employment growth in
the rock-steady education and health sec-
tors, private-sector hiring is trending
downward as well (see chart). Wage growth
weakened in September, slipping to 2.9%
year-on-year from 3.2% in August.
A slowdown is not a contraction, how-
ever. Weaker wage growth in September
mostly reflected soggy increases for man-
agers, not workers in non-supervisory
roles. And there is recent precedent for
consumers helping America’s economy tosail through a manufacturing downturn.
Both output and employment in manufac-
turing fell in 2016. Though growth and hir-
ing slowed more broadly, they stayed posi-
tive, and the economy bounced back the
next year.
Yet a repeat performance could be hard
to pull off. In 2016, as now, America’s fac-
tories were hit by a worldwide manufactur-
ing slowdown and a slump in global trade.
Then, in 2017, trade recovered strongly as
China’s government sought to pep up do-
mestic growth. American exports to China,
which shrank in 2015 and 2016, surged in- Barring a miraculous resolution of the
trade war, nothing similar is likely this
time round.
Moreover, in 2017 America’s economy
received a boost from the prospect of Mr
Trump’s tax cuts. But the impact of expan-
sionary fiscal policy peaked in the second
quarter of this year. By 2020 the federal
budget is forecast to reduce, rather than
add to, economic growth. As the Demo-
crats’ impeachment inquiry gains steam,
and congressional business is halted, the
prospects of another round of stimulus
look dim.
Most probably, the American economy
will neither sink into recession nor regain
full vigour in the year between now and the
presidential election in November 2020.
But that will be small consolation to Mr
Trump. A similar scenario in 2016 deprived
the Democrats of the chance to campaign
on a strong economy, and probably con-
tributed to Hillary Clinton’s defeat. In the
absence of a large, and positive, surprise,
the economy may not be the electoral asset
Mr Trump had probably been expecting. 7
WASHINGTON, DC
Slowing growth could become an election issueAmerica’s economyFacing factories
In sickness and in healthSource: Bureau of
Labour Statistics*Excluding education & health
services and manufacturingUnitedStates,employment
% changeona yearearlier2011 12 13 14 15 16 17 18 19-10123
Otherprivate*ManufacturingEducation &
health services