The Credit Squeeze May Be Easing

Commercial and industrial loans rose 10 percent in the third quarter

Since the start of the financial crisis, U.S. banks have been more interested in shoring up their balance sheets than lending. Banks raised their levels of equity capital after the U.S. Federal Reserve 2009 stress tests revealed weakness in their assets because of the housing slump and the deepest recession since the 1930s. Now, U.S. bank credit is growing at the fastest pace in three years, giving the Fed confidence in the economic expansion’s staying power.

Financial institutions increased commercial and industrial loans by an average annual pace of almost 10 percent in the third quarter, the highest since the comparable quarter in 2008, according to Fed data. The latest numbers show seasonally adjusted loan growth of 15 percent in October and 6.1 percent in November.

The resumption of lending means a projected fourth-quarter pickup of 2.8 percent in gross domestic product may be sustained next year despite Europe’s sovereign-debt crisis, says Robert McTeer, former president of the Federal Reserve Bank of Dallas. In a sign of increasing confidence in the expansion, the Fed’s policy group saw no need for new monetary easing at its Dec. 13 meeting. “The bank-credit statistics argue that more stimulus isn’t needed,” says McTeer, a distinguished fellow at the Dallas-based National Center for Policy Analysis. The Fed considers loan data an important sign that reinforces its forecast for accelerated growth, so the trend is “very encouraging,” he adds.

Defense contractor General Dynamics increased its long-term borrowings to $3.9 billion in the third quarter from $2.4 billion in the second quarter. Part of this went to new plant and equipment spending, including a $500 million expansion at Gulfstream Aerospace, the business-jet maker, spokesman Robert Doolittle says. Magnum Hunter Resources, an oil and natural gas exploration and production company in Houston, increased its long-term borrowings to $209.5 million in the third quarter from $145.8 million three months earlier. “Our available credit with our banks this year” has increased five times, Chief Financial Officer Ron Ormand said in a statement.

“We are looking at a clear upward trend in lending to businesses,” says Ian Shepherdson, chief U.S. economist at consultant High Frequency Economics. “If that continues, and I think it will, then I think that the small-business sector, which has been in a horrible state, will contribute strongly to growth next year.” Shepherdson predicts GDP will expand more than 3 percent in the fourth quarter, the fastest this year, and 3 percent in 2012.


    The bottom line: With loan growth of 15 percent in October, a sustained recovery is looking likely for 2012, especially if small business can get credit.

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