Dive Brief:
- Small businesses faced more difficulty getting a loan last month than at any time in the past decade, the National Federation of Independent Business said Tuesday, flagging “concern that a banking crisis could develop” in the aftermath of bank failures last month.
- Compared with February, a larger proportion of small business owners expect reduced sales and said they plan to trim hiring, capital outlays and increases in employee compensation, NFIB said, describing details of a monthly survey. An index of business optimism fell, remaining below a 49-year average for the fifteenth consecutive month.
- “Small business owners are cynical about future economic conditions,” NFIB Chief Economist Bill Dunkelberg said in a statement. Inflation and difficulty hiring qualified employees persisted as the top two challenges for small businesses, the NFIB said.
Dive Insight:
Turbulence in the U.S. banking system may trigger a credit tightening equal to an increase in the federal funds rate ranging between 0.25 percentage points and 0.75 percentage points, Chicago Federal Reserve President Austan Goolsbee said Tuesday, citing estimates by private sector economists.
“We’ve been tightening financial conditions to bring inflation down, so if the response to recent banking problems leads to financial tightening, monetary policy has less to do,” Goolsbee said, noting that banks tightened lending standards before bank failures last month.
The Fed, aiming to cool inflation, has raised the benchmark interest rates to a range between 4.75% and 5% in nine consecutive meetings during the past year.
“We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting inflation down,” he said. “At moments like this, of financial stress, the right monetary approach calls for prudence and patience — for assessing the potential impact of financial stress on the real economy.”
The International Monetary Fund also said Tuesday that bank failures last month may cause a credit squeeze that bolsters central bank efforts to curb price pressures.
“A silver lining is that the banking turmoil will help slow aggregate activity as banks curtail lending in the face of rising funding costs and of the need to act more prudently,” the IMF said in its World Economic Outlook report. “This should partially mitigate the need for further monetary policy tightening.”
Partly in response to tighter credit, U.S. economic growth will likely fall to 1.6% this year and 1.1% in 2024 from 2.1% last year, according to estimates by IMF economists. World output growth will probably fall to 2.8% in 2023 from 3.4% last year.
Consumers saw a pullback in bank lending last month, the New York Fed said Monday. The share of households reporting less access to credit compared with a year ago rose to a record high in a data series spanning nine years. Households also expect credit will be harder to obtain a year from now.
A credit pullback by regional banks — the focus of turbulence in March — would especially crimp funding for credit cards and mid-size businesses as well as lending for autos and commercial real estate, Goolsbee said.
“Even financial stress that doesn’t spiral into a crisis can still lead to a pullback in credit and have some material impact on the real economy,” he said.
For example, the restructuring of savings and loan associations beginning in the 1980s “made the 1990-91 recession worse and significantly slowed gross domestic product growth in the subsequent recovery,” Goolsbee said.
