The downward revision of estimated first quarter GDP growth last week attracted considerable attention, but many investors shrugged off the news as essentially quantifying what had long been understood: the unusually harsh winter was bad for business.
But many forward-looking indicators, such as the recent surge in commercial and industrial loans, are promising and point toward a period of sustained growth. Companies are increasingly looking for new capital investment opportunities for new ventures and expanded operations, as well as increasing inventory volumes at established businesses. This surge in business investment has driven commercial lending activity into double-digit annualized rates—an increase that reflects widespread economic optimism from businesses all around the nation. These loans will finance new factories and stores, leading to new job creation and hopefully sustained economic growth. Architectural billing—another early indicator of economic expansion—has also experienced strong growth, and the value of private non-residential construction projects (i.e., buildings in which people will someday work) has been rising steadily.
Cynics will undoubtedly point to the continued lackluster growth in business equipment investment, but the decline in equipment spending and financing over the past few years can actually be attributed to the distortion caused by the expiration of a tax holiday enacted during the recession to stimulate business investment. Many savvy businesses timed their purchase of new equipment to take advantage of the tax break, causing the spending lull that has followed its expiration. Federal budget sequestration also impacted this indicator and led many agencies and contractor companies to cancel or postpone numerous equipment purchases throughout the military supply chain. While this further contributes to the decline in equipment purchasing, it has little relationship to the economy’s underlying health.
While this year’s strong corporate lending growth isn’t likely to dispel the persistent myth that decreased lending is to blame for our economic woes, it should continue to weaken it. Commercial lending activity has actually been growing faster than the overall economy since 2011. However, the 2008 recession—which followed a lending spike in 2007—hit many insolvent businesses particularly hard, and the trauma and dislocation of the crash will likely shape public perception for years to come, despite data to the contrary.