Who says banks aren't lending? Banks are lending by the bushel. Commercial & Industrial Loans are a good proxy for bank lending to small and medium-sized businesses. These types of loans are up 13% over the past year, and have now posted a net increase of over $300 billion in just the past two years.
Money is in plentiful supply. The M2 measure of money is up over 8% in the past year, and has jumped at a 12.8% annualized rate in just the past 3 months. On a nominal basis, the M2 money supply has increased by over $3 trillion in the past 5 years. That works out to $1.6 billion per day.
Most of the increase in M2 has come from bank savings deposits. Despite the fact that they pay almost nothing in interest, the public has added almost $3 trillion to their bank savings accounts in the past four years. That translates into growth of over 10% per year. The huge increase in savings deposits is the flip side of the public's confidence in the future: low confidence and extreme risk aversion have persuaded households to sock away massive amounts of money in bank deposits. This is money that could be turned loose to fuel a significant boom in growth and prices once the public begins to regain its confidence in the future.
Car sales are up at a 13% annualized pace since their recession low. This is now the most incredible recovery in auto sales on record.
U.S. crude oil production is up 40% in the past four years, and up 20% in just the past year, thanks to new fracking technology. And the boom is just getting underway.
These two charts could be the most bullish of all. Natural gas production (top chart) is up by one-third in the past six years. The huge increase in natural gas production has caused the price of natural gas to decline by about two-thirds relative to crude prices (bottom chart). The U.S. now enjoys a huge advantage over other countries because it has easy access to the world's cheapest source of energy (natural gas). The huge change in relative prices is almost certain to cause monumental changes throughout all the industries that are energy intensive, as companies switch from crude to natural gas. This dramatic change in the type of energy we use and its price could have a major impact on U.S. growth in the coming years.
After four years of a devastating collapse, housing starts are now up 58% in just the past two years!
Housing starts were so low for so long that the housing stock shrunk significantly relative to demand. As this chart shows, housing prices are up almost 10% in the past year. Demand and supply have come back into balance, and demand—fueled by the lowest mortgage rates in history and abundant cash—threatens to push prices higher still.
These are all impressive charts, but this last is the most impressive of all. Thanks to three rounds of Quantitative Easing, the Federal Reserve has purchased a net $1.5 trillion of MBS and Treasuries, and has created a similar amount of bank reserves in the process. Almost all of the increase in reserves is still sitting idle at the Fed, which means that banks are content to hold a huge portion of their balance sheets in reserves paying only 0.25%. As is the case with consumers who love savings deposits for their safety rather than their yield, this reflects a banking system that is still very risk averse. Should that change, however, and should banks become more willing to lend, they have an almost unlimited potential to do so. If the Fed fails to manage this huge excess mountain of reserves properly, it could quickly turn into an Everest of extra liquidity washing through the economy, boosting growth and boosting prices in the process.
All of this bears close attention, since it runs directly counter to the popular meme that the U.S. economy is struggling and possibly on the verge of another recession. Where there's a lot of smoke, as these charts show, there is bound to be some unexpected fire.
As a supply sider, I am as gloomy as anyone when it comes to the outlook for the economy at this juncture. The fiscal cliff deal will cause taxes to rise on almost everyone, especially risk-takers and small businesses, and that adds up to a drag on growth. Regulatory burdens and costs associated with the implementation of Obamacare are just beginning to have an impact, with much more to come. Higher taxes are in effect validating a higher level of government spending, and that reduces the economy's overall efficiency, and that in turn translates into slower growth than could otherwise be possible.
But when I look at these charts and realize the enormous changes that are occurring beneath the surface of what most believe is a very sluggish and calm economy, I come away thinking that optimism is more likely to be rewarded than pessimism, even though the drumbeat of news is depressing.