NEW YORK — Here's news that should offer little comfort to people struggling to find work: Bank loans to businesses are expanding, but those businesses aren't using the money to fund expansion.
So far this year, banks made $61 billion more commercial and industrial loans — an increase of %6.2% — than in the year-earlier January to August period, Federal Reserve data show. Commercial and industrial loans are business loans excluding real estate. Between January and August last year, such loans fell more than 11% from the year-earlier period.
Bankers say the strongest demand for loans is coming from midsize companies. At KeyCorp, a Cleveland bank where commercial loans rose almost 3% in the second quarter from the first, "our clients are performing better than you might think," said Christopher Gorman, head of corporate banking.
This lending expansion comes at a time of sluggish economic recovery and weak job creation. The reason the lending isn't putting much oomph in employment is that the lending is largely to replace machinery and make repairs and upgrades, as exports are boosted by the falling dollar. Little of the lending is funding the kind of expansion of business that would generate robust hiring.
Businesspeople "have come to a point where they have to spend money to replace infrastructure... that they have put off for the last two or three years," said Michael Slocum, head of commercial banking at Capital One Financial Corp., where loans to midsize businesses rose 6%, to $11.4 billion, in the second quarter.
The resulting loan demand is helping banks while they struggle to increase revenue elsewhere. And increased borrowing suggests to bankers a solidly, if slowly, growing economy: In several interviews, bankers said demand continued to increase during the economically turbulent summer.
"Our loan growth this year has been robust," said Mark Watkinson, the head of commercial banking for HSBC Holdings PLC in North America. "Our month of July, for example, was the best month for loan growth this year. August was also strong."
KeyCorp.'s Gorman said he expects loan demand to further "increase in the fourth quarter."
Bankers' optimism stands in contrast to an anemic economy. The Bureau of Economic Analysis said last month second-quarter gross domestic product rose 1%, less than originally estimated, and first- quarter GDP growth had also been revised downward, to 0.4%. Some economists fear the economy might fall back into recession.
While commercial loans are growing, overall lending is less than it should be, by some measures. Bank analyst Gerard Cassidy of RBC Capital Markets studied loan balances in relationship to GDP, and said he calculated second-quarter loan balances should be over $7.06 trillion, rather than the $6.5 trillion banks reported, given nominal GDP of over $15 trillion.
Large corporations have been accessing the bond market rather than bank loans, and demand from small business and consumers remains subdued.
One reason for the growth in the middle: "Corporate America has never had more cash...debt levels are at all-time lows. It's even better than it was three, four months ago," said Carlos Evans, the head of Eastern Corporate Banking at Wells Fargo & Co.
During the recession, businesses "cut costs, lowered break-even points, increased productivity dramatically," he said. Now, "there's a little bit more willingness to make capital investment, there's certainly more willingness to make strategic investments." The San Francisco bank's corporate loans rose 4.2% in the second quarter, to $157 billion.
The negative side effect of improved productivity — and the overall slow recovery — is that companies aren't hiring, several bankers said. "U.S.-based companies are not borrowing to build new factories," HSBC's Watkinson said.
Dealogic data show that merger-and-acquisition activity among middle-market companies has increased almost 34% in the first half this year from a year earlier. Third-quarter deal activity remains strong. Those deals don't help the economy grow, but generate loans for banks.
Meanwhile, manufacturers' inventories, an important source of loan demand and contributor to GDP, continued to rise, according to the Census Bureau. Inventories were up 13% both in June and July from a year earlier.
And U.S. manufacturing companies "are doing a better and better job in the export market," HSBC's Watkinson said. "There'll be more investment in equipment. I remain quietly bullish about U.S. manufacturing."