Another Positive Indicator: Business Loans Showing Signs of Improvement

by: John Tobey, CFA

Bank lending, a closely watched indicator of economic health, is improving in an important area: Commercial and industrial loans. When, coming out of a recession, banks are willing to lend to businesses and businesses are willing to borrow, it’s typically a positive sign.

The following graph shows the total U.S. commercial and industrial loans held at banks, both domestic and foreign affiliates operating in the U.S. (These loans exclude commercial real estate.)

Click to enlarge:

Note that the amount of loans, after falling about 1-1/2 years, appears to have stabilized. Looking at the 4-week percentage change line, we can see an improving pattern.

Note: I know a rising measurement that is still negative might not be seen as “improving.” However, it is. A good example is someone who is sick with a high temperature. Improvement is a falling temperature, even though it is still not back to normal. So, too, with sick economic measures.

Why now?

A good question is why the long delay from the March 2009 turnaround for many economic measures? The reason is that bankers, when coming out of a recession, need to see and experience economic improvement before they are willing to make new loans. There are three components they require:

  1. Current loans need to get handled. Bankers need to reach the point where write-offs are dwindling and the remaining loans are performing well.

  2. Economic conditions are improving, particularly with businesses they work with.

  3. Businesses are willing to borrow. During recessions, healthy businesses cut back on their borrowing as they reduce expenditures, inventory and capital improvements.

So… Commercial and industrial lending appears to have stabilized. Based on history, we should begin to see positive progress from here.

Disclosure: No positions