One of the concerns that inflation hawks continue to discuss is the potential for trouble when banks start lending out all that liquidity that’s sitting on their balance sheets. At that point, we’re told, inflation will return with a vengeance and the Fed’s great monetary stimulus will become a burden. But inflation remains subdued, with consumer prices rising less than 2% lately, or near the lowest levels in modern history. But some analysts say that if the economic growth picks up this year, the inflation threat will finally start to bite. By some accounts, one of the warning signs that this tipping point is here will be rising levels of commercial loans. Actually, bank lending to businesses has already revived in a meaningful degree. But it looks like the trend has peaked. That throws cold water on the idea that inflation is about to roar skyward. A decelerating rate of commercial lending also raises questions about the health of the economy.
Consider the year-over-year percentage change in the value of commercial and industrial loans (C&I). Using monthly data, the pace of growth is decelerating. C&I lending grew 7.1% in January vs. a year ago, according to the latest monthly release from the Fed. In fact, the chart below shows that C&I lending’s annual rate peaked in July 2012 at 13.4% and has been edging down ever since. Instead of threatening higher inflation, this trend seems to imply the opposite.
There are some dark undertones lurking as well. History reminds that a sharply decelerating rate of business lending is often associated with recessions. Granted, it’s always dangerous to use one indicator to model the current state of the business cycle, and that caveat certainly applies to C&I data. And let’s not forget that C&I lending is still growing at a decent rate. But it’s the directional change that raises questions. As such, this data set deserves attention in the coming months, although the numbers should be read in context with a broad profile of the economy, such as the monthly US Economic Profile that will be updated here in a week or so. By the time C&I tells us anything meaningful about the state of macro, the news should already be obvious from other data sources.
The problem with C&I data, of course, is its long lag time. The January numbers were just released and so we’ll have to wait another month to see how February shapes up. More timely updates on the state of the economy are available elsewhere. Still, it’s useful to watch the C&I trend, if only to provide deeper context for analyzing the macro picture from other perspectives. (Weekly C&I data, by the way, is available for the largest banks and so this metric offers more frequent updates for a subset of the broader monthly statistics. But the annual growth rate is slipping in the weekly updates as well through Feb 28. See the Fed’sH.8 release for details.)
In any case, it looks like C&I lending has peaked for current cycle. It’s too soon to say if this is a troubling sign, a lull before the pace picks up, or just a moderating expansion that’s otherwise a healthy rate of growth. As for expecting sharply higher rates of inflation based on bank lending, the C&I data of late begs to differ.
This piece is cross-posted from The Capital Spectator with permission.