Loans Up, Biz Loans Slower

Bulls and bears on the economy both have a case to make based on recent data on bank lending. On the bull side of the ledger, bank loans and bank credit continue to grow strongly, suggesting continued economic expansion. Moving toward a bearish condition but not quite fully developed yet is the recent trend in commercial and industrial loans, which have been growing more slowly of late.

For the near-term economic outlook, the overall extension of bank credit matters more, but as a leading indicator, the slowing in business borrowing could be significant. It is early on this call, but this is a development that should be watched closely for signs that businesses might be losing confidence in the economic expansion.

At $1.197 trillion, the total amount of commercial and industrial loans is just $1.2 billion below its record high, but the pace of gains for these loans has slowed. In both 2005 and 2006, C&I loans increased 12.8%, gains that were a harbinger of steady economic expansion. Over the past two months, however, C&I loans have contracted by $1.2 billion, with the peak set in the week ended Dec. 20, 2006.

Capital spending has fallen in two of the past three quarters. Bulls will say that the slowdown was in response to worries about high energy costs and plunging home sales, factors that have stabilized of late. Bears will say that concerns on these matters are lingering, especially now that the bulk of the fallout from last year's plunge in home sales may be just beginning. Whatever the case, if C&I loans stay weak, it is likely that business spending will stay weak, too. This bears watching.

The data are released by the Federal Reserve every Friday at 4:15 p.m. ET.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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