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Fed's Williams says bank lending slowdown doesn't worry him yet

·Senior Markets Editor
San Francisco Fed president John Williams.
San Francisco Fed president John Williams.

A recent slowdown in bank lending has some observers concerned that the post-election pops in optimism are sending a false signal about the strength of the U.S. economy.

To San Francisco Fed president John Williams, however, this decline is out of step with everything else credit markets are saying about the economy.

“The big picture is: I don’t see any signs of a slowing either on the demand side or on the credit supply side,” Williams told Yahoo Finance on Wednesday.

“Overall, the other indicators, everything we see, [says] economic conditions are good,” Williams added. “Confidence is good, and we’re not seeing any signs of bank lending standards changing fundamentally. So it’s hard to see anything, from my viewpoint, that [says] credit is less available.”

Lending data can reveal developments on a lag

In recent months, the growth rate of commercial and industrial loans, as tracked by the Federal Reserve’s weekly H.8 report on assets and liability of U.S. banks, has been on the decline.

This is viewed by many as a negative development in an economy where lending and borrowing activity serve as proxies for the economy’s overall health.

Source: Bank of America Merrill Lynch
Source: Bank of America Merrill Lynch

But Williams also cautioned that lending data can reveal economic developments on a lag. For example, he noted to Yahoo Finance that in 2008 bank lending increased, which contradicted the notion that the financial markets were seizing up. Indeed, companies were unable to borrow by tapping the bond markets. However, the lending did increase because companies drew from existing lines of credit.

Right now, Williams noted that one story behind the drop in C&I loan growth going around is that oil and gas companies last year drew on lines of credit, boosting loan growth at the time. And thus the current decline in lending, which appears out of step with broader economic conditions, is occurring largely because of difficult year-over-year comparisons.

Not unusual, but not to be ignored

In a note to clients published on Friday, Bank of America Merrill Lynch economist Michelle Meyer said that the kind of volatility we’re seeing in C&I loans right now, “is not unusual but nonetheless is not something to be ignored.”

And when it comes to looking closer at the nature of which kinds of enterprises are seeing loan volumes increase right now, small business — which has been among the most optimistic areas of the economy since the election — is a laggard.

“All eyes should be on lending to small businesses which presumably has the most capacity for growth given that this sector has seen the slowest recovery in credit creation over the recovery,” Meyer writes.

“Despite the strong gain in confidence among small businesses (as suggested by the NFIB small business optimism survey), there has been a slowing in loans over the past several months. The story of post-election small business optimism leading to greater investment is not (yet) playing out in the data.”

Small business loan growth has cooled off after a spike late last year. (Source: Bank of America Merrill Lynch)
Small business loan growth has cooled off after a spike late last year. (Source: Bank of America Merrill Lynch)

But despite this data running somewhat counter to the narrative that Donald Trump’s election has boosted animal spirits in the economy, Meyer says that history shows there exists a roughly three-quarter lag between confidence rising and credit creation following suit.

And as Meyer writes, “This means the potential improvement in the economy as indicated by the strong surveys is more a story for next year than this year.”

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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