Commercial and industrial lending in the US has been flat for the past six months, the longest stretch of sluggishness in six years. The static trend is weighing on the year-over-year change: business loans increased by just 2.0% in May, the softest increase since 2011, according to Federal Reserve data.
Nonetheless, recession risk remains low, based on data published through May, and near-term projections suggest that slow-to-moderate growth for the economy will prevail. But the stronger headwind in business lending deserves attention as a possible warning sign for the US economic recovery, which marked its eighth birthday last month – the third-longest expansion on record, based on NBER data.
History suggests that business and commercial loans are a lagging indicator for monitoring recession risk. In the last downturn, for instance, the year-over-year growth in lending remained strong in the first few months of the recession that started in January 2008. Even as late as April that year, the pace of lending was accelerating, picking up to a robust 21.5% increase vs. the year-earlier level – a 35-year year high!
The history business lending in previous decades was similarly slow to signal rising recession risk. The one exception: the 1990-91 downturn, when the growth rate for loans fell sharply in the months leading up to the recession.
Overall, the record for business lending isn’t encouraging if you’re looking for timely recession-risk signals. Is it different this time?
Perhaps, although the jury’s still out. The broad trend for the US economy remains positive, albeit at a moderate pace. Nonetheless, the weakness in business lending is a risk factor that warrants close attention in the months ahead.
Researchers have long documented a pro-cyclical relationship between the supply of bank loans and the business cycle, both in the US and abroad. It’s clear that lending dries up once a recession trend is established. The debate is whether this is primarily due to supply (banks tighten lending standards and offer fewer loans), demand (companies reduce borrowing), or a mix of both.
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