US's bank loan growth still accelerating

Broad money growth of the US's has slowed slightly, with the annual growth rate of the M3* measure falling to a six-month low of 5.6% in April. More  importantly, however, the growth rate of bank loans continues to accelerate and hit 8.1% last month. 

Measures of the money stock, which are based on the liabilities side of commercial bank balance sheets, have been boosted in recent years by the Fed's quantitative easing. Even though there has been no multiplier effect, the Fed's purchases of assets have still generated a dollar-for-dollar increase in the bank deposits of the institutions who sold those assets to the Fed. The total value of commercial bank deposits is now roughly $3.5trn bigger than total commercial bank loans. Now the Fed has stopped buying assets, broad money growth will inevitably slow. Indeed, when the Fed finally begins to sell its asset holdings, broad money may even contract. 

At this stage, however, bank loans is a much better gauge of the health of the economy. Bank loan growth began to accelerate in early 2014 and that strength has been widespread, with improvement evident in every major loan category. Admittedly, the latest survey evidence points to a slowdown in the growth of bank loans to businesses, but only a very modest one.

Moreover, that potential slowdown in the growth of bank loans to businesses may be offset by a surge in residential mortgages, says Capital Economics. In particular, at the start of this year mortgage applications finally began to rebound. Businesses are also raising funds freely in the bond market.

Elsewhere, the ECB's efforts to expand its own balance sheet have generated a marked increase in the growth of broad money in the euro-zone, which now matches the US growth rate and far exceeds the UK growth rate. But the comparative bank loan figures tell the true story. Loans are near-stagnant in both the euro-zone and the UK, whereas US banks are lending freely again.