Bank lending is rolling over, giving economists some 'hard' data to worry about

Key Points
  • Pace of commercial and industrial loan growth weakest since 2011.
  • "It's disconcerting," said Yardeni Research's president, Ed Yardeni.
  • In the last week, major bank reports on loan growth confirmed the sluggish pace.
Construction of a high rise office and residential building in the midtown area of New York City.
Robert Nickelsberg | Getty Images

The pace of commercial and industrial loan growth has slowed to its weakest pace in nearly six years, according to Federal Reserve data, adding to worries about economic growth and whether the rally in bank stocks since the election is justified.

Commercial and industrial loan growth rose at its weakest pace since July 2011, at $58.1 billion year over year through the week of April 5, according to the Fed.

Source: Yardeni Research, Federal Reserve Board

"There's a lot of nervousness about the divergence between the strength of soft data following the election and hard data, and one of the weakest examples of that is loans," Ed Yardeni, president and chief investment strategist at Yardeni Research, told CNBC. He cited the data in his morning research note Thursday.

"It's disconcerting," said Yardeni, who is also an economist.

Reports on sentiment, or soft data, have been encouraging, while so-called hard data such as retail sales have painted a less optimistic picture of the U.S. economy. The latest CNBC/Moody's survey estimates the U.S. grew less than 1 percent in the first quarter.

Now loans are showing more reason for real concern about the economy, and an industry dependent on that growth — banking.

Major bank reports on loan growth confirmed the sluggish pace in the last week. JPMorgan Chase said its commercial and industrial loans grew 8 percent in the first quarter from the same quarter last year, unchanged from the fourth quarter of 2016.

Bank of America reported a 0.57 percent year-over-year increase in total loans and leases in the first quarter, down 0.05 percent from the fourth quarter of 2016. Citi said in the first quarter that total loans rose 2 percent year on year, and 1 percent from the fourth quarter of 2016.

That said, Yardeni noted that the recent drop in loan growth could be due to companies paying down debt after a rush to borrow and lock in low interest rates immediately following the U.S. presidential election. At the time, the Trump administration's promises of pro-growth policies looked to send Treasury yields significantly higher. Yields have since come well off multiyear highs hit after the election, partly due to increased geopolitical concerns.

Bank stocks themselves led the postelection market rally but have stalled this year with the drop in yields. The financial sector traded lower year to date on Thursday.

"The whole premise of a rally for banks has got some downside risk in loan demand," Yardeni said.

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