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Banks have more bad news for the economy

Banks have more bad news for the economy

Investors aren't the only ones running for safety as the market tumbles and the economy wobbles.

Businesses, too, are indicating an unwillingness to take on risk as loan demand declined for the first time in about four years, according to the Federal Reserve's Senior Loan Officer Survey released this week.

Demand for commercial and industrial loans has plunged in 2016, with declines happening across business sizes. Large- and medium-sized businesses had an 11.1 percent decline, while demand from small businesses fell 12.7 percent.

Read More Why 2016 keeps getting uglier

For large and medium businesses, the decline was the first since the fourth quarter of 2012 — demand was flat in the second quarter of 2015 — and tracking for the biggest three-month decline since the fourth quarter of 2011.

The decline comes as the U.S. economy emerges from a fourth quarter that saw gross domestic product gain just 0.7 percent. The Institute for Supply Management reported that its index tracking manufacturing registered a 48.2 in January, with a number below 50 representing contraction.

In short, business investment is unlikely to help lead the economy out of its doldrums.

Read More Forecast sees big plunge in Treasury yields

"The weakening in demand for business loans suggests that the growth rate of actual commercial and industrial lending will grind to a halt this year," Paul Ashworth, chief U.S. economist at Capital Economics, said in a note to clients.

"Furthermore, banks reported that the weakness in demand for loans from businesses was primarily because the latter were scaling back their investment plans," he added. "That suggests any rebound in investment in equipment in the first half of this year will be muted at best. With the mining, manufacturing and agriculture sectors all hurting, we hadn't expected much from business investment this year, but the drop off in loan demand is worse than we would have expected."

In addition to the falling demand, banks also reporting that standards tightened for large- and middle-market firms while premiums also rose for riskier loans.

On the positive side, banks reported that demand for commercial real estate loans had increased in January and that lending standards for households had eased. But they also expect lending standards to tighten both for commercial real estate and commercial and industrial loans.

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