Word: banking
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...economic indicators were not recovering, then bank lending would be prime culprit," says top Wall Street strategist Edward Yardeni. "The weak borrowing market just doesn't seem to be stopping the economic turnaround...
Indeed, the numbers are eye-catching. As of Dec. 23, the latest date for which data are available from the Federal Reserve, bank lending, at nearly $6.7 trillion, was down $100 billion from the month before. In the past year, the volume of loans outstanding by banks in the U.S. has fallen by more than $500 billion. Bank loans have been trending down for a while. Worse, most analysts don't see bank lending turning around anytime soon. Paul Miller of FBR Capital says a combination of banks' wanting to take fewer risks and lower demand for credit from consumers...
...while the number of bank loans is falling, the well of credit for corporations is far from dry. In fact, the 22 largest banks in the Treasury's Troubled Asset Relief Program issued or renewed $127 billion in business loans in November, roughly the same as five months ago. And bank lending, now at $6.7 trillion, is at the same level it was at the end of 2007, when the economy was still expanding. That would be a problem if we had serious inflation. When asset prices rise and loan values don't, that can signal economic stagnation...
...Bank analyst John McDonald of Wall Street firm Bernstein Research says most people are focused on how the lack of loans will hurt bank earnings. Lending is, after all, how banks make money. But in the past year or so, banks have had to sock away more and more cash into their reserves to account for their growing number of bad loans. That's caused earnings to plummet. With loans falling, reserve ratios - the measure of reserves to loans - are growing. That means banks will be able to divert less profit into those rainy-day accounts, which should boost bottom...
Finally, unlike the stock market or consumer confidence, bank lending is a lagging indicator. Businesses look for loans to expand once the economy is growing and orders are coming in again. And banks, since they get hurt so badly in recessions (particularly this one), become very risk-averse at the beginning of economic cycles. "In the initial stages of a recovery, banks are never handing out cash," says Lakshman Achuthan, a managing director at the Economic Cycle Research Institute. "It never happens that way, and we have had plenty of recoveries...