Banks in the U.S. are lending the most since the recession ended in June 2009, supporting an economy weighed down by 8.3 percent unemployment.
Borrowing by consumers and businesses rose in the week ending July 25 to $7.1 trillion, within 2.9 percent of its October 2008 peak, according to Federal Reserve data. New lending for autos jumped to $134.3 billion in the first four months of the year, up 56 percent from the same period in 2009, according to credit bureau Equifax Inc.
The increase in lending may prevent the economy from slowing further after growth cooled to a 1.5 percent annual pace of growth in the second quarter. While the Fed last week moved closer to expanding its record stimulus, the figures on credit indicate that 43 months of near-zero interest rates may finally be giving the economy the jolt it needs, said Jim Paulsen, who helps oversee $320 billion as chief investment strategist at Wells Capital Management in Minneapolis.
“Many pieces of the credit-creation process are starting to work again,” Paulsen said.
“Banks are lending, people are borrowing, housing prices are going up and a sense of normality is returning.”
Among the reasons for the pickup in lending: Households, whose spending makes up 70 percent of the economy, have cut debt since the 2008-09 credit crisis, while banks have increased liquidity and bolstered capital buffers. Credit requirements for buyers of new and used cars have eased.
Stocks climbed Monday amid better-than-estimated corporate earnings. The Standard & Poor’s 500 Index rose 0.6 percent to 1,399.01 at 10:35 a.m. in New York.
The economy needs sustained credit growth to begin a cycle of spending and hiring and to reverse the slowdown, said Steven Blitz, chief economist at New York-based ITG Investment Research Inc. Economic growth has slowed from a 4.1 percent pace in the final quarter of last year as consumers and companies pulled back on spending.
“Borrowing is the best indicator out there for future growth,” Blitz said. “If you see the demand to borrow grow, and banks willing to lend to meet that demand, you’ll grow your national income faster.”
Fed officials last week left unchanged their statement that economic conditions would likely warrant holding the benchmark interest rate target near zero at least through late 2014.
Policy makers “will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” the Fed said.
“The Fed will consider loan data” when they next meet on Sept. 12-13, Paulsen said.
Paulsen is more optimistic than many of his peers: He sees the economy growing 2.75 percent to 3 percent in the second half of the year, more than the 2.2 percent median forecast in a Bloomberg survey of 76 economists from July 6-10.
The economy could use a fillip from stronger lending, said Sean Incremona, senior economist at 4Cast Inc. in New York. “We’re still showing pretty weak growth in the economy and we’re not really impressed by the trends going forward, so bank lending would help.”
A Labor Department report last week eased concern the three-year recovery is faltering. While the jobless rate unexpectedly rose in July, employers added 163,000 workers to payrolls, more than forecast and up from 64,000 in June.
The Labor Department will report Aug. 9 that initial jobless claims rose to 370,000 last week from 365,000 in the week ended July 28, according to the average of 37 economist estimates compiled by Bloomberg.
Elsewhere, house prices in the U.K. fell in July for the first time in three months, losing 0.6 percent from the previous month, mortgage lender Halifax said Monday. Finland’s Finance Minister Jutta Urpilainen said the economy may stall next year as Europe’s debt woes stunt the expansion. In Indonesia, the economy unexpectedly accelerated in the second quarter as the country withstands Europe’s sovereign-debt crisis.
Some U.S. growth is coming from automakers and retailers that are adding workers to meet demand as consumers gain access to credit. Fort Lauderdale, Florida-based AutoNation Inc., the largest U.S. retailer of new vehicles, reported quarterly profit that beat analysts’ estimates on July 19.
“The credit environment is very strong, with low interest rates and ample credit availability,” Mike Jackson, AutoNation’s chief executive officer, said on an earnings call.
Greg Williams, a warehouse manager at Box-Board Products Inc. in Greensboro, North Carolina, said he bought a new BMW 535 in June, lured in part by a 2.9 percent, 60-month interest rate, the least he’s ever paid for a car loan.
“We’ve had some pretty good growth at my company and we’re meeting our budgets, and I actually think the economy is OK,” said Williams, 50. The lower rate “made it easier to get into the car and it made it more affordable. Otherwise I wouldn’t have purchased this car.”
Lenders have reduced the average credit score for new-car buyers to 760 in the first quarter of this year from 776 two years earlier, and for used-car buyers to 659 from 665, according to researcher Experian Automotive.
“People want to borrow to buy cars, and banks have been looking at cars as less risky assets in the last couple years, so they’re jumping back into the game,” according to Alec Gutierrez, the senior market analyst at Irvine, California-based auto-market researcher Kelley Blue Book Co.
Sales of bonds tied to payments on subprime car loans are accelerating at the fastest pace in five years. Issuance of asset-backed debt linked to vehicle loans to borrowers with sub-par credit records rose to $10 billion from January until July 30 compared with $8.2 billion in the same period last year, according to Barclays Plc.
“We’ve been seeing a lot of pent-up demand coming back into the market from people who didn’t buy in the past few years,” said Lacey Plache, chief economist at auto researcher Edmunds.com in California.
U.S. auto sales are on pace for the best year since 2007. Light-vehicle deliveries rose 8.9 percent in July to 1.15 million, and first-half sales are up 15 percent, setting a pace for more than 14 million annual sales, according to researcher Autodata Corp.
“Consumer spending is something that has ripple effects throughout the economy, and autos are certainly helping prop up the pace of recovery,” Plache said. Autos and auto parts comprise 7 percent of U.S. manufacturing, according to the Fed.
Consumers have become more attractive to lenders by paring debt.
A gauge of household indebtedness fell for a record 12 straight quarters to the lowest level since 1994.
The ratio of household debt payments to disposable income declined to 10.98 in the first quarter, down from a peak of 13.96 in September 2007, according to Fed data.
Total outstanding U.S. consumer credit, which includes student loans, has rebounded close to a record. The Fed’s tally of short- and intermediate-term loans to individuals, excluding real estate lending, rose to $2.57 trillion in May, near the $2.58 trillion peak in July 2008.
The value of bank loans in the U.S. has increased for five straight quarters, rebounding to more than $7 trillion from last year’s low of $6.69 trillion in March 2011, Fed data show. Loans to individuals account for $1.11 trillion of that total.
“We’re getting back to a financial system where the economy can grow closer to its full potential,” said Jerry Webman, chief economist at New York-based OppenheimerFunds Inc., which has $177 billion in assets.