Monday, January 24, 2011
Late last year I highlighted a variety of charts that painted a picture of "impressive economic strength." In this post I revisit one that has displayed some impressive follow-through: Commercial & Industrial Loans, a good measure of bank lending to small and medium-sized businesses. The top chart shows the past 5 years' worth of data, while the bottom chart zooms in on the past several months (both are seasonally adjusted by the Fed). The message is very clear: bank lending to businesses has bottomed, and is now rising at a fairly impressive rate. This marks a very important change in financial conditions in recent months: after two years of a sharp decline, bank lending is up at a 13.6% annualized rate since Nov. 24th.
Unfortunately, we can't know whether the recent strength in new lending reflects an easing of bank credit standards or a new-found desire on the part of businesses to borrow (or stop deleveraging), or both, but it's likely a combination of the two. In either case, however, it reflects increased confidence on the part of banks and small businesses, and that is something that has been sorely lacking in this recovery.
The rise in new lending may also reflect an emerging decline in the demand for money (borrowing money is equivalent to being "short" money, or wanting less of it), and that could mean the Fed's QE2 program is gaining traction. The Fed's massive expansion of bank reserves has not yet resulted in any meaningful expansion of the money supply, as I noted yesterday, since banks have been content to let their extra reserves sit idle at the Fed, but this may now be changing, if C&I loans are any guide.
Nothing is out of control yet, of course, but if there has indeed been a real decline in the economy's demand for money, then this, coupled with increased business confidence, would point to a meaningful increase in nominal GDP growth in coming months. That nominal increase would likely be comprised of a pickup in inflation as well as a pickup in the pace of real growth.
Posted by Scott Grannis at 11:54 AM