Loan Demand Lagging Even as Economy Turns

Though the latest batch of indicators point to a pickup in economic growth, demand for commercial loans remains low and could stay that way for some time.

Instead of taking out loans, many companies will either for-go expansion or rely on internally generated funds, economists say. For some loan officers, that is likely to mean sitting on the sidelines during the economic rebound.

"It's the worst part of the economic cycle for the banking industry. Our customers don't need us," said Jerry L. Jordan, chief economist at First Interstate Bancorp.

There is no question that credit demand is slack. Showing the sharpest decline since the recession of 1982, bank loans and outstanding commercial paper declined at an 8.6% annual rate in the three months ended May 22, according to ISI Group, a New York-based economic consulting firm.

A sharp drop in commercial paper outstanding accounted for much of the decline. But ISI found that bank loans, including commercial, personal, and real estate loans, also fell during the period - at a 4.4% rate.

Cause for Worry

Edward Yardeni, chief economist at C.J. Lawrence, Morgan Grenfell Inc., said he sees the situation as especially worrisome for banks. He noted that commercial loans outstanding, charted on a 12-month moving average, declined in April, the first monthly decline since the recession of 1974-1975.

Clearly, businesses and consumers are still jittery. "Total credit demands have been declining and are likely to continue to decline as economic activity remains restrained," noted Edward S. Hyman, chief executive officer of ISI Group.

"From a credit perspective, there's not much of a recovery under way," added Alan Levenson, director of U.S. financial services at the WEFA Group, a Bala Cynwyd, Pa.-based economic consulting firm.

Locking in Rates

The drop in commercial paper outstanding, however, could reflect the desire of companies to lock in low fixed-rate debt by selling bonds carrying longer maturities. Corporate bond issuance has increased this year as companies exploit historically low long-term interest rates.

While some banks are active in the commercial paper market and a few can take customers to the bond market, commercial loans remain crucial to banks. Said one analyst, gloomily, "Loans are the main product a bank has to sell, and most banks are unable to show solid earnings growth without loan growth."

Sluggish Growth Foreseen

First Interstate's Mr. Jordan said he believes the expected expansion will be similar to that of the early 1960s, when growth crept along at a sluggish pace for two to three years before accelerating. "It's going to be a tough environment for our businesses," he said.

If there is a credit crunch, it can't be blamed on the banks' lacking enough money to lend. As bank lending has fallen this year, the banking system's assets have grown by $28 billion through April.

Buying Government Securities

The explanation? About $25 billion of that increase has been parked in government securities, said Mr. Levenson of WEFA.

Some economists said they believe these statistics show that the so-called credit crunch has more to do with a decline in demand than any cutback in credit supply.

"There is no absolute shortage of credit supply," said Theodore Tung, chief economist at National City Corp. "There has been a lack of demand."

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