Since the beginning of the year there has been an ongoing hope that businesses were on the verge of a capital expenditure cycle that would boost economic growth. The primary supporting evidence of this hope was contained within the surge of corporate business loans and leases as shown in the chart below.
 
 This is an issue that I addressed previously asking some basic questions:
“Is this spurt in activity historically relevant? Have such increases previously led to surges in economic activity or inflation? Or, is this activity just an anomaly that will rectify itself in the months ahead?”
The answer is “not really.” As shown in the chart below, surges in bank loans and leases are more a lagging indication to economic growth rather than a predictor of it. When put into this “context” the surge isn’t nearly as impressive.
Businesses respond to changes in “demand.” When the economic is weak, and demand slows, businesses move into a defensive position and reduce costs in order to preserve profitability. As economic activity and demand increases enough to restore “confidence”to businesses, they will begin to increase production, expand facilities and increase employment. As confidence increases in the sustainability of the underlying economic growth, they will access loans and leases to further expand operations. This is why bank loans lag changes in economic growth.
The problem is, as shown in the recent National Federation Of Small Business survey, confidence by businesses in the economy and plans to increase capital expenditures remains extremely muted and at levels more consistent with economic recessions than expansions.
As Bill Dunkleberg, NFIB Chief Economist, stated:
“The latest Reuters/University of Michigan poll shows 10 percent of consumers characterizing government policy as ‘good’ and over 50 percent say ‘poor’.Other than ‘economic conditions’, the ‘political climate’ is the most frequently cited reason for not expanding businesses. This is the major impediment to a stronger recovery. Owners are experiencing far too much uncertainty and no sign that the powers that be will get any of it resolved.”
