Weak Demand Cause for C&I Lending Slowdown
Weak demand may be the cause of a slowdown in growth for commercial and industrial (C&I) lending, rather than tighter credit, according to a report from Wells Fargo Securities. The pace of commercial and industrial lending at domestically chartered banks has slowed over the past year and is consistent with previous periods of economic weakness in 1990, 2001 and 2008. But the net percentage of banks that are tightening standards for such lending is easing, so other factors are at play.
A drop in the need to increase spending on business equipment is one reason. Firms are able to produce at the current pace of economic output. “The expected pace of final sales in the economy has come to reflect the steadiness of 2% economic growth over the last five years,” Wells Fargo said. Business equipment spending fell by 0.5% in 2016 after gaining 2.1% the year before.
Also, profit margins have declined. There is less incentive to add to capacity as a result. Finally, firms are able to exercise tighter control over inventories. “There is little need to borrow funds since both the real quantity of inventories has been low and little incentive exists to borrow in anticipation of higher inflation prices for inventories goods,” Wells Fargo said. “Inventories were a drag of 0.4% on growth in 2016 and are expected to add just 0.1% this year.”
– Adam Fusco, associate editor