One overlooked issue that’s holding back the recovery

The U.S. economy’s showing more signs of warming up, but not everyone’s sold on a full turnaround yet. Goldman Sachs says that a couple of major factors are deterring the firm from upgrading its economic forecast, as Joe Weisenthal points out. Among them are headlining issues like the euro zone mess and volatile oil prices. But there are also issues further under the radar: Goldman points out that banks aren’t loosening their standards for business loans, even as demand for such credit has been on the rise.

Over the past three months, domestic banks have either maintained the same loan standards or tightened them somewhat for large and medium businesses, while foreign banks have also reported “a net tightening of their lending standards,” according to the Federal Reserve’s latest survey of loan officers. Here are the responses from the large U.S. banks included in the report:

(Federal Reserve)

At the same time, the same banks report that demand for these commercial and industrial loans is strengthening, as it has over much of the past year:

All this suggests that there could be potential for more growth in the business sector that isn’t being realized yet as banks remain somewhat cautious about loosening their lending standards. The good news is that banks are extending bigger lines of credit to the businesses that do take out commercial and industrial loans. And they’re also slowly becoming more comfortable with loaning money to consumers. “As in the previous three surveys, small fractions of domestic banks reported having eased standards on credit card, auto, and other consumer loans,” the Fed survey notes. And if the economic optimism continues in 2012, banks could ease up more on business loans as well.