The pressures of the recession have begun to ease, but the financial system continues to see weak loan demand across the country, the Federal Reserve says. That doesn't bode well for bank profits in the near term.
The central bank's periodic report on the state of the economy, as judged from a survey of its 12 regional banks, confirms the trend seen in second-quarter bank earnings reports earlier this month: Things are not as bad as they were, but they're not as good as they used to be, either.
Overall bank lending was stable or weakened further, the Fed's Beige Book report says. Businesses remained pessimistic and reluctant to borrow, and demand for commercial and industrial loans continued to fall or stay weak in half of the Fed's regions, including New York, where two of the three biggest U.S. banks are based.
Mortgage refinancing activity fell dramatically in the Richmond district, which oversees
Without solid loan growth to boost revenues, banks are forced to rely on other activities. In the second quarter, the biggest banks got a boost from bond trading, but most analysts think such gains are unsustainable.
It's hard to see just when a rebound in loan demand will come, even though the politicians in Washington have staked a recovery (not to mention a multitrillion-dollar rescue of the financial system) on getting banks to lend. Manufacturing activity remains depressed but with signs of improvement, the Fed said Wednesday. Auto parts suppliers have "precariously low" business volumes. Refinery activities are weak because of low demand for fuel.
Believe it or not, this is actually better news than last month. Even Fed Chairman Ben Bernanke recently remarked that the economy should start growing again in the second half of the year.
In the Fed's assessment, the pace of decline has moderated and the economy has stabilized, even if at a low level. That gives politicians enough ammunition to put a positive spin on things.
Speaking at a town hall-style meeting in Raleigh, N.C., on Wednesday, President Barack Obama said, "It's true that we've stopped the freefall. The market is up and the financial system is no longer on the verge of collapse. We're losing jobs at nearly half the rate we were when I took office six months ago. So we may be seeing the beginning of the end of the recession."
Retail spending is sluggish, below last year's levels, as buyers focused on necessities and put off spending on big-ticket items, the Fed says. Travel and tourism declined and auto sales were mixed. If the recovery depends on consumer spending, the recovery could be awhile coming.
