Friday, May 30, 2014

Economic Outlook

Guest Blog Post by Kamran Afshar, Ph.D., Chamber Economist
The Chamber’s Finance Committee

Have banks really started to lend money to businesses again?

After the financial crash and the onset of the Great Recession banks significantly reduced their lending to businesses. However, it should be noted that even in good times banks are more willing to lend to those that can guarantee repayment, i.e. those that already have resources. To be fair, banks are also businesses and must ensure that there is a reasonable certainty of debt repayment.

As a result of the Great Recession, the volume of commercial and industrial loans from all commercial banks in the US dropped rapidly. In October 2008, the total of all business loans was $1,598.8 billion but by October 2010 the amount of loans sank to $1,200.2 billion, a drop of 24.9 percent.

Beginning in October 2010, the volume of loans started to climb. On average, banks increased their commercial and industrial loans to the tune of $10 billion a month.

While the economy is in a state of recovery, the rate of the recovery has left a lot to be desired. The Great Recession was deeper and more devastating than anticipated and most forecasts underestimated the rate of the decline and projected a much faster recovery. The Great Recession, by it’s very definition, was more than just a recession and that is probably why all the estimates, based on previous recessions, were skewed towards a faster and stronger recovery.

An increase in the level of business loans is a precursor to increased business activity, which itself is the final precursor to higher employment and faster economic recovery. As of January 2014, the nominal amount of business loans has exceeded pre-crash highs by $14.3 billion, although when adjusted for inflation it is still about $100 billion below its highs, however, the gap is closing fast.

The economy is clearly in a recovery mode, and despite the devastating weather patterns experienced across the country, the spring will herald some stability in both weather and economic activity. It is expected that economic activity will pick up and be back on track with its semi-strong recovery.

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