Business lending by banks fell during March from the previous month, the first such decline in several years and a sign to economists that business conditions are not gaining fresh strength.
"It says to me that we were right several months ago about a slow-growth economy and the latest hysteria about rapid growth and inflation is just that," said James W. Coons, chief economist at Huntington National Bank, Columbus, Ohio.
Surveys by the federal government over the past two months have shown a much larger rise in employment than expected by Wall Street. As a result, interest rates have risen sharply in the credit markets on worries about renewed inflation that might stem from higher growth.
As a result, stocks, including banks' shares, have been hit hard in a major selloff.
But the latest Federal Reserve data show that commercial and industrial loans by all banks dropped by 0.2% during March after a gain of 0.5% in February. The last such month-to-month decrease was in December 1993.
On a year-to-year basis, C&I lending was up 7.9% in March after advances of 8.7% in February and 10.4% in January, part of a waning trend for over a year.
"This tells us that prospective growth conditions are slowing down," said Lacy H. Hunt, chief U.S. economist for HSBC Holdings, parent of Hongkong and Shanghai Bank.
"Over past cycles, the monthly and yearly rate of change figures in bank C&I lending have been excellent leading indicators of conditions up to two years out," he said.
"The C&I loan figures are very much related to capital spending, particularly for small firms," said Mr. Hunt. "And we are now beginning to see other signs that this is going to be a very poor year for capital spending."
"The latest Census Bureau survey of capital spending shows a rise this year of only 1.5% in current dollars," he said. Last year, capital spending, a key component of economic growth, rose by 8.1% on a current- dollar basis.
Manufacturers expect to spend 7.2% more this year, but retailers and wholesalers, perhaps fearful of high consumer debt and lackluster sales, are planning a 4% capital spending cutback.
The economist noted that such spending typically does not decelerate until the economy has already turned down, "so the fact that it is slowing now is not very encouraging."
Another economist, Patrick J. Flaherty of Fleet Financial Group, Providence, R.I., noted in that bank's weekly economic survey that "times of slow growth" present special difficulties in reading the direction of business conditions.
"Slow growth and low inflation seem to be the order of the day and all the foreseeable tomorrows," he said. "Eventually the bond and money markets will figure this out and settle down."