Economy Stirs But Loans Lag, The Fed Reports

WASHINGTON -- Bank lending and loan demand remain sluggish as the U.S. economy begins to recover from recession, the Federal Reserve Board reported Wednesday in its latest summary of regional economic conditions.

The Fed delivered a moderately upbeat economic assessment in the report, known as the Beige Book, which will serve as a guide for the next meeting of the Federal Open Market Committee, on July 2.

The book cited modest improvements in consumer spending and the manufacturing, construction, and real estate sectors.

Home Loans a Bright Spot

Residential mortgage lending "continues to be the only source of strength in loan demand," it said.

The report found demand for business and consumer loans generally weak, although the Kansas City and Cleveland Fed districts showed some strength in consumer lending.

Home equity loans and refinancings helped boost mortgage lending, but there were isolated signs of growing weakness. The Federal Reserve Bank of New York, for instance, reported a slowdown in consumer loan payments.

The Richmond district bank saw some evidence that credit is tight, but it said weak loan demand was the main factor that dampened business lending.

No Surprise

Bank economists said it was no surprise that lending remains lackluster. They predicted lending will pick up once the economy firms somewhat.

"As economy gets better, bank lending will improve," said Stuart G. Hoffman, chief economist of PNC Financial Corp., Pittsburgh. "There will be more demand for loans, and lenders will be more comfortable in making loans as the financial viability of companies improves."

Banks already are evaluating which sectors will be the winners once the economy begins to expand, said Jerry L. Jordan, chief economist of First Interstate Bancorp, Los Angeles.

On the consumer side, Mr. Jordan favors automobile and home equity lending. On the commercial side, he picks small-to-medium sized telecommunications and travel and leisure businesses as good borrowers.

One area that shows no signs of imminent recovery is commercial real estate lending.

"The gradual improvement in the overall economy is not lifting the nonresidential real estate market," Mr. Hoffman said. "That's where a lot of lending constraints are still in place."

But Mr. Jordan thinks residential real estate construction lending could rebound soon.

"It's no longer an absolutely taboo subject," he said. Lenders are beginning to listen to requests to fund apartment and condominium projects. "You don't get the door slammed in your face any more."

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