The construction credit environment remains stable but fragile and is still a restraint on starting new projects and continuing with a few previously started projects. Homeowners and businesses that can show solid loan payment coverage in a recessionary economy can get credit rollovers and new loans although new loan demand is very small and still declining. Other prospective borrowers, an increasingly large share of households and businesses are often unable to rollover current loans and generally can not get additional credit. Nominal interest rate remain relatively low but inflation adjusted rates are clearly above average in a credit constrained world with financial de-leveraging still underway for more than another year.

A “magically” fix to the credit problem today would have little impact on credit extended and economic growth. Generally unsuccessfully borrowers do not have income and balance sheets good enough to get a loan in any credit environment. The Federal Reserve Board (FRB) is printing enough money to cover loan demand from credit worthy borrowers and has promised more since Congress refuses to appropriate funds.

The FRB never expected to have to do this but they have forced to step in when the rest of official Washington has declined to take responsibility. There will be enough credit to finance at least the initial phase of economic recovery. Lenders are still carrying a huge surplus of lendable funds, hoarding money, because they do not like the loan applications that they are getting and they are keeping a cushion against the possibility that Obama’s housing policies will further erode their mortgage related assets.

The FRB is increasingly nervous about its own overextended financial position and is making plans to extract some of the recent influx of credit before it becomes a serious inflation problem. In 2010 and beyond expect very expensive credit when the surplus liquidity in the financial markets begins to be extracted to avoid rapid inflation. This means relatively sluggish economic growth after the initial economic recovery. Capital goods industries, including construction, will be operating in a credit constrained environment for several years.