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The rebound in commercial and industrial (C&I) lending rolls on, but for how long? Recent history suggests a case for thinking positively. The value of C&I loans has risen in each of the last eight months through June. That’s the longest stretch of monthly increases since the recession formally ended in June 2009 and so it’s an encouraging sign that lending — a key indicator of future economic activity — has entered a period of sustained growth.

True, C&I loan growth has slowed recently but it has yet to reverse course. As The Wall Street Journal reports:

Even with the economy stuck in neutral, three of the nation's biggest lenders — Bank of America Corp. (NYSE:BAC), Wells Fargo & Co. (NYSE:WFC) and KeyCorp (NYSE:KEY) — are sounding more hopeful that businesses are accelerating their borrowing.

Then again, looking backward can be dangerous in these precarious economic times. Indeed, there are some worrisome cracks forming in C&I’s momentum. It’s too soon to say if the recent burst of higher lending has run its course, but it’s hard to dismiss the risk given the downshift in economic activity overall in recent months.

Taking a closer look at C&I loans doesn’t offer much comfort. Although total loan value is still growing, the rate of growth slowed considerably in June, rising just 0.3% last month vs. the 1.0% rate posted in each of the previous three months.

[Click all to enlarge]

Weekly data for C&I loans at large commercial banks so far in July also suggests that the trend is rolling over, as the second chart suggests.

It’s premature to declare the revival in lending as another victim of the recent slump, but it’s not too soon to start worrying. Lending tends to be a lagging indicator, which is to say that it recovers well after a recession has ended. That’s certainly been true in the latest cycle. But it’s also true that once lending revives, the growth is persistent and robust for an extended period. If the narrative doesn’t hold this time, that would be a dark sign for the wider economy at this stage.

Lending, after all, is a critical part of economic growth. It’s no surprise to see the pace of lending fall sharply in times of economic stress, if not fall outright. As such, if loan growth starts to falter in the weeks and months ahead -- so soon after it began to expand -- that would be another sign of trouble for the broader economy.

But let’s not jump to conclusions just yet. There are still reasons to be optimistic. One obvious example: The stock market is still firmly in the black on a year-over-year basis, which suggests that the crowd still thinks the risk of a new recession is low. You can find some corroboration for that view by looking at the annual trend in various economic metrics. Even private-sector job growth, although battered in recent months, remains comfortably in the black relative to year-earlier comparisons.

Much depends on what happens next, however. The wrangling over the budget in Washington surely leaves lots of room for debate over the risks that lie ahead. In the meantime, if loan activity continues to decline, keeping the faith isn’t going to get any easier.

For the moment, there’s still a good argument for remaining cautiously optimistic and expecting the economy to muddle through. But even this thin reed is subject to revision on a moment’s notice these days.

Source: Can Commercial Lending's Revival Survive the Summer Slump?