(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
April 1 A remarkable rise in U.S. bank lending
may hold the key to the outlook for the U.S. economy, but it
could be either very good or very bad news.
Lending for commercial and industrial purposes rose at a
26.4 percent seasonally adjusted annual rate in February,
according to Federal Reserve data released last week, the
biggest such spike since the 2008 fall of Lehman Brothers.
As is so often the case, it is hard to know if this
represents the first rays of dawn or simply an oncoming train.
If companies are taking out loans to make investments and
hire new workers, we may finally have fulfilled one of the
missing preconditions of a sustainable recovery.
On the other hand, banks often draw down existing loans
during times of stress, either to fund working capital needs or
because, as was the case in 2008, they fear being denied funds
either by banks or capital markets.
The lack of capital investment by corporations - despite
high profit margins - is one of the principal puzzles of the
last several years of muted growth. Capitalists being presumed
to like making profits, the expectation has been that high
profit margins will lead to high investment. But despite record
corporate profits, rather than investment, which often involves
borrowing, we've instead been treated to the spectacle of
corporations piling up cash, sometimes offshore with a view to
tax arbitrage, or investing not in new capacity but in buying
back their own shares.
To be sure, debt has continued to increase as a percentage
of economic output, but the growth has been in government debt
and in consumer debt, often taken out to fund education as a
means of riding out what now feels like a permanent employment
So anything that indicated that banks and customers are
willing to take the risk and engage in a wave of new commercial
lending has the capacity to be an excellent sign.
It is also certainly true that after years of concentrating
on margins, corporate assets are looking a bit frayed, a
situation ripe for a new investment wave. Equipment owned by
corporations is as old as it has been since 1995. Intellectual
property, even in this age in which IP is supposedly short-lived
and easily supplanted by 'disruptive' new ideas, is as old as it
has been since 1983, a point in time, I will remind you, when
the war between Beta and VHS format videotape (young people, ask
your parents) was not yet settled.
But signs this investment boom is actually happening are
thin on the ground. A new survey of company chief financial
officers by Deloitte, LLP, showed plans are for slightly less
capital investment in the coming year compared to plans a year
ago. Hiring expectations were also subdued, with plans for
domestic hiring to expand just 1 percent in the coming year.
This leaves us with the other possibility, that companies
are taking out loans, usually existing committed facilities, at
a faster pace as a defensive maneuver. Even though there are
clear precedents from 2008, 2007 and the late 1990s when
something similar happened, this is still a puzzling move.
Capital markets remain not just open, but when it comes to
riskier borrowers, buoyant. Indeed terms and conditions are
generally loose and getting looser, a development watched by
central bankers and other regulators with some concern. The most
recent Federal Reserve survey of senior bank loan officers
showed that, at least for mid-sized and large firms, borrowing
was getting easier and spreads and other terms and conditions
more attractive for borrowers.
The other possibility is that we are seeing a number of
firms all having to finance unexpectedly high levels of
inventory at the same time. If sales don't come through as
expected, perhaps because of the exceptionally cold weather or
perhaps because of the beginnings of a slowdown, companies will
draw on existing loans to tide them over until demand picks up
That phenomenon, that bank lending can grow in a recession,
is supported by the Fed itself, which published in December a
short piece explaining its thinking as it relates to bank
The clear implication is that banks see their loans rise
more than they would expect based on demand in the economy,
meaning they have larger loan books which suffer more losses.
That implies the need for more capital.
It is, of course, unclear what is happening.
If, however, we are seeing a pickup in lending due to a
sudden slowdown in demand, the clear implication is not just
tougher times for banks, companies and stock markets, but for
the economy as a whole.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at firstname.lastname@example.org and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)