Debt Concerns Put Brakes on Lending

By DAVID GAFFEN The Federal Reserve has been determined to jump-start lending by financial institutions, one way or another, and news of improvement in this area has become an obsession with investors, as well. While cash levels on bank balance sheets have nearly tripled from a year ago, loan growth has declined in each of the past three weeks, according to Fed data. That suggests banks still aren't ready to lend, their customers aren't interested in borrowing, or some combination. Amid a recession, cost-conscious companies are often loath to add debt to their balance sheet. That is a reason loan growth at the nation's commercial banks tends not to rebound until several months after recessions hit their trough. As of February 2009, growth in loans and leases was rising at a 2.86% annual rate, the slowest rate of growth since September 2002. After "tough economic times, the last thing you want to do is saddle your balance sheet with fixed costs," says David Resler, chief economist at Nomura Securities. The 2000-01 recession officially ended in November 2001, according to the National Bureau of Economic Research, but the growth rate in loans didn't bottom out until March 2002. The previous recession ended in March 1991, but loan growth didn't bottom until July 1992. Loans can fuel economic activity, but it takes a certain level of economic activity to fuel demand for loans. When companies are ready to expand payrolls, and "if production stabilizes, the need for financing grows," says Tony Crescenzi, chief bond market strategist at Miller Tabak. For early indicators of a lending rebound, investors should focus less on loan data than on inventory levels, along with commentary from executives about improved demand or rising sales.