Business lending is booming

As the chart above shows, Commercial & Industrial Loans outstanding at U.S. banks grew at a 19% annualized pace in the first three months of this year. These loans are mostly to small and medium-sized businesses that are not able to access the capital markets directly. It's good news not because more loans mean more spending and/or more economic activity (lending doesn't create growth, but it can facilitate growth by distributing capital to people and businesses can make productive use of the money). It's good news because it reflects a significant increase in confidence on the part of banks and businesses. Confidence has been in short supply for most of the current recovery, as can be seen by the tepid growth of business investment and the disappointingly slow growth of the economy. That looks to be changing for the better now.

Banks have had the ability to increase their lending virtually without limit ever since the Fed began its Quantitative Easing program in late 2008. However, lending didn't really pick up until the beginning of last year, right around the time the Fed announced the tapering and eventual end of QE. Things have changed dramatically since then. With rising confidence comes a reduced demand for money (i.e., money in the form of cash and cash equivalents like bank reserves, which exceed required reserves by about $2.5 trillion), and this validates the Fed's decision to stop growing its balance sheet. On the margin, banks are becoming less and less willing to sit on trillions of excess reserves; they'd rather lend money to the private sector than to the Fed, and they are beginning to do that in spades.

With lending activity booming, this is no time to be pessimistic about the economy's prospects.