The latest business loans numbers show that bank loans to businesses are still falling. As I have written in recent posts here and here, large banks have systematically shut down their lending to small businesses over the past 2 months, an unintended consequence of the hugely profitable government bailout programs. Basically, today if you can’t sell it to the government don’t bother making the loan.

Bank Loans to Businesses Still Falling

The chart above, from the Federal Reserve Bank of St. Louis, shows commercial and industrial loans from all banks. Banks have loaned approximately -$100 billion to U.S. companies since last fall. Tough to make payroll when you have to pay more to the bank than you get from the bank.

Bank C&I Loans Latest Data

The latest weekly figures, above, show that banks have reduced loans to businesses by $15.8 billion–roughly -$4,000,000,000 per week–in the past month alone. That does not mean there is less borrowing; it means there is negative borrowing. Banks have forced their business customers to actually pay down their loan balances by $4 billion per week. The only way to do that in a small business is to lay off a worker or sell some inventory or other assets at a deep discount.

Essentially all business loans are small business loans–big public companies get their working capital in the commercial paper market. This is a major reason why employment continues to fall.

This is not the end of the world. I wrote a few days ago, in a piece called Time to Think About the Next Story-Inflation, Rising Rates, Commodity Prices, Weak Dollar, that the tsunami of bank reserves released by the Fed over the past six months is hugely profitable for banks and will eventually force a reopening of the credit markets. This chart is just to remind you that it is going to take longer to show up in jobs numbers than it has in bank stock prices.

JR

One of the (many) problems with using big increases in federal government spending as an economic stimulus tool is timing. You can’t appropriate and spend it fast enough to matter much during the downturn. Spending it years later, after the economy has already begun to recover on it own, then becomes an inflation worry.

There is a new CBO study, Implementation Lags of Fiscal Policy, that details the path of the money this time around. In spite of all tyhe talk we have seen about shovel ready projects not much of the money has actually made its way into the economy yet. As you can see in the figure above, except for HHS and the Dept. of Labor, less than 2% of the money appropriated to all other departments (Education, Transportation, Energy, …) has been spent. The total spent so far is just $24.6 billion out of $379 billion.

Stimulus Spending is Too Slow-Less than 25% Will be Spent in 2009

This chart details how much of the $787 billion in stimulus money will hit the economy each year over the next three years. As you can see, only 11% of the $308 billion appropriated to discretionary spending like highways, mass transit, energy and education will be spent by the end of this year. Overall, less than a quarter of total funds will be spent in 2009.

Why is this s problem? Because there are early signs of recovery coming in now every day. By the end of this year the recovery will be undeniably underway. That means next year (2010) and the year after will be periods of rapid growth and rising inflationary worries. That’s why bond yields have increased by more than a full percentage point in recent weeks with more to come over the coming months. And that’s one of the reasons why commodity prices have been rising so fast.

Investors should be very careful to avoid long-term Treasury bonds today

JR

About like it has been (4 week average is 628K, originally reported as 631K). Economy is starting to firm up a bit but the job numbers are being held down by the recent further tightening in bank credit lines for small businesses. Banks did this in order to focus bank resources on “things they can sell to the government in boatload quantities” that have a huge return for the bank. Banks have frozen working capital lines, home equity lines, personal lines and nonconforming mortgages (jumbos) for even top quality borrowers.  Jobs can’t pick up until small companies can borrow money again.