The U.S. credit market is undergoing significant contraction, showing signs of a potential economic crisis. As of Q1 2025, credit activity has contracted at the fastest rate since 2013, suggesting a possible economic downturn.
Current Credit Market Trends
The U.S. credit market contracted by 0.8% year-over-year (y/y) in real terms in Q1 2025, the sharpest contraction since 2013. Over the past seven decades, periods of inflation-adjusted credit market contraction have consistently been followed by recessions or crises.
Historical Context
In periods of healthy economic growth, credit activity tends to increase by 4 - 5% per year in real, inflation-adjusted terms, as seen from 1995 to 2007. During credit frenzies, such as in 1998 and 2006, credit growth reached 7 - 8%. Excluding the "credit explosion" of mid-2020, driven by government stimulus programs and guaranteed loans, the post-2009 period saw peak credit growth in 2018 at 3.5 - 3.8% y/y. Most of the time, growth remained between 1.9 - 3.3%.
Consumer Credit Contraction
In the current tightening cycle, credit growth has remained weak. Since mid-2022, real credit growth has never exceeded 1.5% y/y. By early 2023, growth turned negative and has been accelerating in its contraction since late 2024. In Q1 2025, consumer credit contracted by 3.7% y/y in real terms - the sharpest drop since the 2008 - 2010 crisis (which saw a contraction of 3.8%). Current consumer credit levels are at their lowest since Q4 2018, indicating no progress in over six years.
Corporate Credit and Mortgage Loans
Corporate credit is also showing signs of distress, contracting by 1.2% y/y in real terms in Q1 2025. This marks zero growth since early 2020. From mid-2021 onwards, corporate credit momentum has remained volatile, hovering around zero with no discernible trend. Mortgage loans, including those secured by commercial real estate, show similar weakness, with near-zero growth, the lowest levels since 2013 - 2014. In real terms, mortgage loans have been flat since Q4 2024.
Aggregate Lending and Economic Impact
Overall, aggregate lending has contracted by 0.3% in real terms since the start of the QE tightening cycle in Q1 2022. This marks the weakest performance in lending, with the exception of the 2008 - 2009 crisis, since the early 1990s during a comparable period.
Conclusion
The sharp contraction in U.S. credit markets signals an impending economic crisis. With consumer and corporate credit shrinking, and mortgage loan growth stagnating, the indicators are pointing toward a downturn similar to past recessions. If these trends continue, the U.S. economy could face a crisis of significant scale, especially as lending conditions continue to tighten.