How to Improve Economic Growth, Increase Bank Lending

How to Improve Economic Growth, Increase Bank Lending

How to Improve Economic Growth, Increase Bank Lending

This morning's GDP numbers were not encouraging, and although it indicates a deep slowdown in the growth rate between first quarter and second quarter, the last 10 years have shown a lot of variation in first quarter performance that indicates it is not a bell-weather for the year, says Mercatus scholar and economist Bruce Yandle.

"If there's one thing that could help us have a stronger year, I would pick to increase lending from the commercial banking system. Right now bank lending is stagnant, and loan activity is always a indication of growth--new housing, new cars, expanding businesses, and more," said Yandle. "Commercial bank lending has been in a state of decline for 10 of the last 12 quarters, that's 30 of the last 36 months, because of tighter lending standards imposed by regulators, and weak demand from small and medium businesses."

There are three things that contributed to lower growth in the first quarter: the effect of rising gas prices, inflation, and bad weather, he said.

"Inflation doubled from 1.1% in the fourth quarter to 2.2% in the first quarter, but that's when they take out food and energy prices. For real people, inflation is 3.8% (including food and energy prices)," said Yandle. "This is troublesome because it puts the consumer in weaker position without a meaningful increase in wage and salary. It's like being on a fixed income, purchasing power diminishes, and it makes the average person a little bit poorer."

Bad weather also contributes to a decline in non-residential construction activity, he said.

"When the largest weakness in unemployment is in construction, 1 unemployed person out of 10 is a construction worker, this will have an effect on the jobs situation," said Yandle. "A revised forecast of 2.8% growth for the year is too low for meaningful job growth. We need 3% or higher."

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