U.S. bank credit is growing at the fastest pace in three years,giving the Federal Reserve confidence in the economic expansion'sstaying power.

Financial institutions increased commercial and industrial loansby an average annual pace of almost 10 percent in the thirdquarter, the highest since the comparable quarter in 2008, comparedwith a 1.7 percent decline in the past four years, according to Feddata. The latest numbers show loan growth of 15 percent, seasonallyadjusted, in October and 6.1 percent in November.

The resumption in lending means a projected fourth-quarterpickup in gross domestic product may be sustained next year evenamid Europe's sovereign-debt crisis, said Robert McTeer, formerFederal Reserve Bank of Dallas president. He predicts the centralbank's policy group, which has moved to push down long-terminterest rates and pledged to keep its benchmark federal funds ratenear zero through mid-2013, probably won't approve new monetaryeasing at its Dec. 13 meeting.

“The bank-credit statistics argue that more stimulus isn'tneeded,” said McTeer, 69, a distinguished fellow at the Dallas-based National Center for Policy Analysis. The Fed considers loandata an “important” indicator reinforcing its forecast for growthto accelerate, so the trend “is very encouraging.”

Banks have eased lending terms this year after raising levels ofequity capital following 2009 Fed stress tests and reducing lossesstemming from the housing slump and deepest recession since the1930s. Credit markets froze and financial institutions tightenedstandards after the bankruptcy of Lehman Brothers Holdings Inc. in2008.

The “improved loan demand” is “encouraging,” agreed FederalReserve Bank of Atlanta President Dennis Lockhart, a formercommercial banker. “Businesses are more of a mind to expand,” hesaid Nov. 29 after an economic-outlook conference in Atlanta.

General Dynamics Corp., a defense contractor, increased itslong-term borrowings to $3.9 billion in the third quarter from $2.4billion in the previous quarter. Part of this went to new plant andequipment spending, including a $500 million expansion plan overseven years at Gulfstream Aerospace, a business-jet maker inSavannah, Georgia, spokesman Robert Doolittle said.

Magnum Hunter Resources Corp., an oil and natural-gasexploration and production company in Houston, increased itslong-term borrowings to $209.5 million in the third quarter from$145.8 million three months earlier.

“Our available credit with our banks this year” has increasedfive times “based on the success of our drilling programs,” ChiefFinancial Officer Ronald Ormand said in a statement.

Bright Spot

Fed officials cited commercial lending as a bright spot duringthe Nov. 1-2 Federal Open Market Committee meeting, saying it“accelerated” beyond “strong increases” in the first half of theyear, based on the minutes published Nov. 22. Domestic banks haveloosened standards for eight consecutive quarters, according to theFed's October 2011 survey of senior loan officers released Nov.7.

“We are looking at a clear upward trend in bank lending tobusinesses, and that to me has been the missing link,” said IanShepherdson, chief U.S. economist at High Frequency Economics Ltd.in Valhalla, New York. “If that continues, and I think it will,then I think that the small-business sector, which has been in ahorrible, horrible state, will really contribute strongly to growthnext year.”

Housing, which has aided every post-World War II recovery exceptthe one after the 2007-2009 recession, hasn't rebounded from afive-year slump, so the improvement in business investment ishelping to pick up the slack.

Shepherdson predicts GDP will expand more than 3 percent in thefourth quarter, the fastest this year, and 3 percent in 2012. Thatcompares with the 2.8 percent and 2.1 percent median forecasts ofeconomists surveyed by Bloomberg News from Dec. 2 to Dec. 8. TheFed's governors and regional-bank presidents project 2.5 percent to2.9 percent growth next year.

U.S. lenders had net income of $35.3 billion in July- September,the best performance in four years, as loan-loss provisions and netcharge-offs fell, Federal Deposit Insurance Corp. data showed Nov.22. They put aside 47 percent less money for bad loans, andcharge-offs fell by 39 percent, the FDIC said in its QuarterlyBanking Profile released in Washington.

“Every bank in the U.S. benefits” when loan demand strengthens,since lending is “very profitable,” said Richard Bove, an analystat Rochdale Securities LLC in Lutz, Florida. Most corporationsborrow at rates higher than the prime rate of 3.25 percent, while10-year Treasury notes yielded 2.06 percent at 4 p.m. on Dec. 9 inNew York.

'Buy' Ratings

Bove rates Bank of America Corp., Citigroup Inc., JPMorgan Chase& Co., Wells Fargo & Co. and U.S. Bancorp as “buy.”

Commercial lending is “very strong for us,” U.S. Bancorp ChiefExecutive Officer Richard Davis said at an investor conference Dec.7. “Our growth last quarter was very good. Our growth this quarteris better than last quarter, and so the momentum continues.”

Lending also supports greater investment in equipment andsoftware, which increased by more than 15 percent in the thirdquarter after an almost 15 percent rise in 2010, Bureau of EconomicAnalysis data show. This investment — for goods ranging fromcalculators to aircraft — contributed about a full percentage pointto the quarter's 2 percent growth.

During the recession, the share of business investment in GDPfell to about 9.2 percent, the lowest since the mid-1960s.

“There is a very high correlation between growth in bankcredit and growth in demand in the economy,” said Paul Kasriel,Northern Trust Corp. chief economist and a former Fed staffer. “TheFDIC data suggest banks — and perhaps bank regulators — are morecomfortable with bank-capital positions in order to support newlending,” he said.

While credit creation is positive, he said he worries about theimpact of shocks from the European Union and other regions.

“We now are faced with a weakening in foreign demand, as the EUlikely has entered a recession and the economic growth in thedeveloping economies, such as China, is slowing because of priormonetary tightening there.”

Some companies also don't have access yet to lenient terms, saidDiane Swonk, chief economist and senior managing director atMesirow Financial Inc. in Chicago. “The best borrowers are gettingsolicited like crazy,” she said. “They have cash on their balancesheets and are getting low and easy credit. Everyone else is prettymuch shut out.”

Repeated Rejection

Alan LeBlanc, 49, president of Brewed to Serve Restaurant GroupInc., which owns Max Lager's Wood-Fired Grill & Brewery inAtlanta, said borrowing remains tough. He spoke with “probably twodozen banks” over more than a year and was repeatedly rejectedbefore a Georgia community bank approved an $800,000 loan thismonth for a new restaurant that will employ 60 people.

All this means economists aren't predicting a return to the 10.5percent average annual increases in loans from 2005 to 2007 thathelped fuel the housing bubble and a construction boom. Lendingother than to businesses isn't recovering much. Bank real-estateloans declined 2.4 percent in the third quarter, while consumerloans rose 2.2 percent, Fed data show.

Responding to complaints that small companies still have troublegetting funding, Fed officials have held forums in Atlanta, Chicagoand Denver to look at “frictions that impede the flow of credit tocreditworthy borrowers,” Chairman Ben S. Bernanke said Nov. 9.

New York Fed President William C. Dudley, in a Nightly BusinessReport interview Nov. 16, said he recently had “probably the mostpositive meeting” with his small-business advisory group that he'shad “in terms of the willingness of banks to engage with them.”

Overall, the availability of loans improved by more than 25percent between March 2010 and October 2011, according to data fromthe National Federation of Independent Business in Nashville,Tennessee.

Custom Cable Assemblies Inc. of Warner Robins, Georgia, had “noproblem” borrowing $300,000 recently from BB&T Corp. to doubleits office and warehouse space, an expansion now underconstruction, Chief Financial Officer Terry Di Diego said. DiDiego, 56, and her husband, Joseph, 58, who is president, run the17-employee maker of cables for the aerospace industry.

Their company, which has operated with an “extremelyconservative” use of debt, benefited from a 26-year history, DiDiego said. “We had three banks competing over us.”

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