Commercial paper issuance is strong and resembles the robust recovery in corporate activity that took place after the financial crisis. The level of commercial paper outstanding is mirroring the increase in economic activity that began in the fourth quarter of last year.
Despite the bumpiness of the summer months, there hasn’t been this much commercial paper outstanding in a decade.
Despite the recent downgrades in growth forecasts for gross domestic product—the consensus is 5.9% this year and 4.1% next year, both well above the long-term rate of 1.8%—the issuance of commercial paper implies that the corporate sector is likely to boom as the delta variant fades and the economy expands.
Why focus on commercial paper? Its surge is directly related to the upswing in commercial activity, with day-to-day financial needs of businesses growing along with the broader economic revival.
This is one key not only to supporting the current economic expansion but also to getting back to full employment somewhere below 4% like before the pandemic.
Despite the bumpiness of the summer months, there hasn’t been this much commercial paper outstanding in a decade. Just as the peak in June 2011 came in the immediate recovery from the financial crisis, we are in another episode of businesses playing catchup to increased demand. So we’re in good company.
And just as in 2011, there are several reasons for the strength of the commercial sector after a devastating shock.
Among them is the worldwide response of the monetary authorities to quickly flood the commercial market with liquidity. And then to sustain that viability, the central banks have kept interest rates near zero and will do so for as long as it takes to maintain normal levels of activity.
As the Federal Reserve moves to reduce the pace of its monetary accommodation—the tapering of its monthly asset purchases and eventual increase in the policy rate—we do not anticipate any material disruption to either the level of commercial paper issuance or the rate markets.
The tightening of Fed policy after the financial crisis and the drift higher in the commercial paper rate did not have a negative effect on the increasing level of commercial paper outstanding.
We expect a similar outcome as market participants, investors and policymakers prepare for the inevitable end of pandemic-era monetary policy.