Dive Brief:
- A credit crunch threatens growth at 85% of small businesses, imperiling expansion plans by 67% of those companies and prompting 21% to doubt their long-term survival, Goldman Sachs found in a survey.
- Nearly four out of five small businesses (78%) fear that they may fail to gain access to capital under current conditions, and only 29% say that they can afford to take out a loan, Goldman Sachs said, citing a survey of 1,240 small business owners early this month.
- A National Association for Business Economics survey also revealed a grim view on borrowing, with 55% of economists saying that higher interest rates pose the biggest threat to the outlook, exceeding the challenge from inflation. In a July survey, only 24% identified higher borrowing costs as a leading risk.
Dive Insight:
Federal Reserve policymakers gather Tuesday for a two-day meeting to weigh conflicting signals on the outlook for inflation and economic growth and decide the next step in their most aggressive monetary tightening in four decades.
Exploding forecasts of a slowdown, gross domestic product expanded at a 4.9% annual pace during the third quarter, largely fueled by a 4% gain in consumer spending, the Commerce Department said Thursday. Consumer outlays rose just 0.8% during Q2.
A robust labor market, along with savings set aside during the pandemic, prompted consumers to spend beyond economists’ expectations.
Payrolls rose 336,000 last month, far above forecasts. The surge pushed up the monthly average in jobs growth during the third quarter to 266,000.
“The economy’s recent performance has consistently exceeded the prior expectations of many who expected a recession by now,” according to Moody’s Analytics. “Growth was nothing short of robust.”
At the same time, inflation has showed some signs of easing. The core personal consumption expenditures price index — the Fed’s preferred inflation measure — fell on an annual basis to 2.8% from April through September compared with 4.5% during the previous six months.
Yet in a change emblematic of the mixed picture policymakers will assess, core PCE in September rose 0.3% compared with just 0.1% in August.
Several other factors dim the economic landscape, including repercussions from the March banking crisis, the waning of consumers’ pandemic savings, the resumption of student loan payments, war in the Middle East and the fallout from the United Auto Workers strike, according to Moody’s.
“The outlook turns darker,” Moody’s said. “The recent pace of growth is likely unsustainable as high interest rates take their toll, so recession risks will remain high well into next year, job gains will throttle back as the full impact of the Fed’s unprecedented interest rate hikes” hit home, Moody’s said.
After considering the economy’s many crosscurrents, policymakers on Wednesday will probably conclude their meeting with a decision to hold the main interest rate at between 5.25% and 5.5% — a 22-year high, according to investors and market analysts.
Traders in interest rate futures on Monday set 98% odds that the central bank will not change the benchmark rate, according to the CME FedWatch Tool.
The bond market has recently done the Fed’s work of monetary tightening.
Since policymakers met last month, the yield on the 10-year Treasury note has risen about 0.5 percentage points to 4.8%. The yield is the benchmark for corporate bonds, auto loans, mortgages, student loans and other financing.
The Fed will probably not raise borrowing costs again during the current tightening cycle and, after the economy slows early next year, will begin cutting rates in June, Moody’s said. It predicts GDP growth of 2.1% this year and 1.4% in 2024.
The NABE “survey results suggest a more challenging business environment as the economy slows,” Ellen Zentner, chief U.S. economist at Morgan Stanley, said in a statement.
“Sales are seen as growing, but at a slower pace, and profit margins are reported to be declining,” according to Zentner, president of NABE.
