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Commercial and Industrial Loan Growth Hints at Rising Aggregate Demand


Loan growth is a good way to gauge trends in aggregate demand; it generally presages plans to expand operations, which implies capital investments and new hiring.

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The Wall Street Journal was out with an article today highlighting the fact that commercial and industrial loan growth is back in positive territory for the first time since the financial crisis hit in late 2008.

Corporate balance sheets were in good shape prior to the crisis and they are in even better shape now due to deleveraging and restructuring. Thus, there is ample room on US corporate balance sheets to take on new debt to fund growth.

The question is: Why would companies want to borrow money? Companies typically don't borrow money to simply have it sitting around; they typically plan on spending it. For this reason, loan growth is a good way to gauge trends in aggregate demand. Loan growth generally presages plans to expand operations. This implies capital investments and new hiring.

The Wall Street Journal article rightly notes that the loan-growth trend is still incipient. But combined with other data points such as the rapid decline in jobless claims, the surge in employment reflected in ADP numbers, and the very bullish new orders and backlog numbers in the ISM manufacturing and services surveys, the loan-growth figures seem to confirm an emerging pattern of rising demand.

The perking up of money-supply measures, particularly the broader gauges such as M2, MZM and M3, provide further confirmation of this trend as they reflect an increased demand for money that is finally responding to the easy supply conditions.

Increased demand for business credit signals rising business expenditure and employment. This implies rising aggregate corporate and personal incomes which will, in turn, stimulate additional demand for goods and services. The growing demand for goods and services creates demand for additional business expenditure and hiring. And so the business cycle goes.

In sum, there are mounting signs that the US economy is poised to shift into self-sustaining mode.
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