August 20, 2009 / 3:22 PM / 10 years ago

UPDATE 1-Commercial paper rise hints US economy is growing

(Adds analyst quotes, context, byline)

By John Parry and Dena Aubin

NEW YORK, Aug 20 (Reuters) - The U.S. commercial paper market expanded in the latest week, suggesting the economy may be growing again after the longest recession in decades as the two-year-old global credit crisis slowly eases, analysts said.

It was only the second time since April that the overall size of the market had expanded on a weekly basis; the first time being earlier this month.

For the week ended Aug. 19, the size of the U.S. commercial paper market, a vital source of short-term funding for routine operations at many companies, rose by $35.8 billion, the biggest jump in at least four months, to $1.111 trillion outstanding, from $1.075 trillion the previous week, Federal Reserve data showed on Thursday.

In two years of credit market turmoil, the market’s size has halved, from about $2.2 trillion outstanding in August 2007 when the crisis first erupted.

Now, however, “it appears that the freefall we saw in commercial paper may be ending,” said Ray Stone, an economist with Stone & McCarthy Research Associates in Princeton, New Jersey.

The commercial paper market, a main conduit of short-term borrowing for companies and banks, froze up from summer 2007 as fears that counterparties might not repay what they owed fueled the gathering global financial crisis.

Now the incipient stabilization of this market — which the Federal Reserve propped up to prevent corporate borrowers being starved of short-term funds — seemingly confirms other signs in economic data that the recession is ending, analysts said.

Because companies use commercial paper to fund activities such as restocking shelves and meeting payroll costs, higher issuance typically signals companies are responding to an upturn in demand as the economy gains momentum.

“It appears from the commercial paper data that the inventory liquidation cycle is bottoming and with that the inventory drag on gross domestic product will be diminished in the third quarter, probably leading to a smartly positive number of about three percent growth,” Stone said.

Unsecured financial issuance outstanding rose $38.1 billion after rising $12.1 billion the previous week.

Banks and other financial institutions may be borrowing more via the commercial paper market and less via government guaranteed debt issuance programs, which are likely to be gradually wound down in coming months, analysts said.

The rise in financial issuance in the commercial paper market could reflect the activity of “some traditional commercial paper issuers that have relied more on using government support to raise capital and now some of those programs are coming to a close,” said Lawrence Glazer, managing partner of Mayflower Advisors in Boston.

Asset-backed commercial paper outstanding, a subsector which was severely impacted by the housing bust, fell $6.2 billion to $416.3 billion in the latest week after falling by $12.3 billion the previous week. (Editing by James Dalgleish)

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