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ANALYSIS-U.S. bankers voice new optimism as businesses line up for loans

Michael Erman
Sunday, 19 Jan 2014 | 9:00 AM ET

NEW YORK, Jan 19 (Reuters) - Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Increasing demand for bank loans often is a prelude to higher economic growth. With the U.S. government budget crisis fixed for now and Europe showing signs of economic recovery, companies feel more comfortable borrowing to invest in machinery, factories, and buildings.

JPMorgan Chase & Co Chief Executive Jamie Dimon, who has long described himself as "cautiously optimistic" about the economy, recently dropped the modifier "cautiously," he said on a conference call with investors last week.

"We're using the word optimistic because we are actually optimistic," he added.

"The sun and moon and stars are lined up for a very successful year" in the U.S., he said the next day at a conference in San Francisco.

"I don't see any weak spots in America," Dimon said, noting that corporations, small business, the stock market and the U.S. housing market are all showing signs of improving.

Outstanding loans to companies reached an all-time high of $1.61 trillion at the end of last year, topping a record set in late 2008, according to Federal Reserve data released on Friday.

Bankers say that anecdotally, business customers are more hopeful than they had been.

"I am hearing more when I talk with customers about their interest in building something, adding something, investing in something," Wells Fargo & Co CEO John Stumpf said on a conference call with investors last week. "There is more activity going on."

To be sure, signs persist that economic growth is still tepid.

Job growth slowed sharply in December, when U.S. employers hired the fewest workers in nearly three years, partly because of winter storms. And while holiday sales rose 0.2 percent in December, it was at the cost of heavy discounting by retailers.

But the U.S. grew at a relatively fast annualized 4.1 percent in the third quarter, and General Electric - often looked to as a barometer of the health of the U.S. industrial sector - said on Friday that it had record orders for jet engines, oil pumps and other industrial goods.

"We have seen some moderate strength in the U.S.," GE Chief Financial Officer Jeff Bornstein said in an interview, even if he cautioned that the company has not yet seen "the breakout broadly across the economy."

Bornstein said the company's strong backlog reflects the growing middle classes in emerging and developing countries around the world.

"We see solid demand for loans as we head into 2014" from businesses, particularly large corporations and healthcare companies, along with owners of commercial real estate, Bank of America CFO Bruce Thompson said on a conference call with analysts on Wednesday.

U.S. consumer loans, including mortgages and credit cards, also have been steadily rising since early 2011, according to Fed data.

CORPORATE COMFORT

Analysts on average forecast U.S. growth of 2.9 percent in 2014, close to the long-term average for the United States but a bit stronger than in recent years.

Credit is the lifeblood of the economy, and lending volume has been relatively weak since the financial crisis. Some economists fault banks for holding onto the purse strings too tightly, while others fault companies and consumers for being too timid to spend.

But whatever the cause, demand for credit has started to turn around. Paul Kasriel, former chief economist at Northern Trust Co, notes that total bank investments in loans and securities, combined with the Federal Reserve's securities holdings, have been growing at an accelerating pace since the fourth quarter of 2012, soon after the Fed started its latest round of bond buying to stimulate the economy.

Year-over-year growth for that figure was 8.7 percent in the third quarter of 2013, the latest period for which complete data is available, compared with an average of 7.2 percent since 1953. Growth in this measure of credit tends to happen one quarter before economic growth picks up, he added.

And while Fed bond buying contributed substantially to the growth, Kasriel said, rising demand from the private sector for loans should make up for a tapering of bond buying by the Fed at least for the first half of 2014.

Lending is not always a long-term positive sign for the economy, as in the run-up to the last crisis, when an explosion of bad mortgage loans brought the financial system to its knees. But Kasriel said lending standards had tightened since then and loans made are now of higher quality.

Bankers are hopeful, too.

"People have been feeling bad for six years. There's a natural psychological reaction when you go through a period like that where you just want to feel better. It doesn't take too much positive news to make you feel better, and that's what we're beginning to see," said Kelly King, CEO of bank BB&T Corp .

Mike Corbat, CEO of Citigroup Inc, the most international of the big U.S. banks, said on Thursday that the outlook for economies around the world is better now than last year.

"Growth looks better. Economies continue to heal," he said.

(Reporting by David Henry, Peter Rudegeair, Michael Erman and Lewis Krauskopf in New York and Poornima Gupta in San Francisco; Editing by Dan Wilchins, Peter Henderson and Steve Orlofsky)