Behind Banks' Brisk Lending

It may well be the mother of all merger booms: From January through June, 1995, notes economist Maury N. Harris of PaineWebber Inc., U.S. mergers and acquisitions (M&As) hit $189 billion--a record for a first half.

The M&A boom helps explain what has been an anomaly to some economists this year: the strong surge in banks' commercial and industrial loans--at a time when inventory growth was presumably starting to slow. Bank loan officers recently told the Federal Reserve that M&A loans were one of two leading factors behind their brisk lending.

The upshot, says Harris, is that bank business-loan data could give off misleading signals. If M&As pick up more steam, as they have in every second half for the past 10 years, they could buoy loan demand even as spending on inventories and capital goods slows--suggesting that real economic activity is stronger than it is.