Dive Brief:

• U.S. small businesses look ahead to the coming six months with the highest sense of uncertainty since the National Federation of Independent Business began measuring their outlook 38 years ago.
• “Small business owners are feeling more uncertain than ever,” NFIB Chief Economist Bill Dunkelberg said in a statement Tuesday in a report on a monthly survey. “Many Main Street owners are left questioning whether future business conditions will improve,” he said, noting that inflation and high financing costs have eroded profits.
• The proportion of small business owners reporting inventory gains last month fell to the lowest level since June 2020, and the average interest rate they paid on short-term loans was 10.1%, 0.6 percentage point more than in August and the highest level since February 2001, the NFIB said.

Dive Insight:

Relief from high borrowing costs for businesses of all sizes is nowhere in sight even though the Federal Reserve on Sept. 18 cut the main interest rate by a half percentage point to a range between 4.75% and 5%.

Since the day before the Fed easing, the yield on the 10-year U.S. Treasury, the benchmark lending rate, has risen from 3.66% to 4.02% as bond traders scaled back their forecasts for rate cuts amid signs of economic strength.

The Atlanta Fed on Tuesday upgraded its estimate for third quarter economic growth to an annual rate of 3.2% from 2.5% on Oct. 1.

The sunnier estimate followed a Labor Department report Friday that U.S. employers last month added 254,000 jobs, far higher than expected and the largest increase since March. The jobless rate in September fell to 4.1% from 4.2% in August and 4.3% in July.

The surge in jobs has also prompted some economists to predict that the Fed will scale back or forgo further rate cuts this year even though central bank officials last month forecast reductions in the federal funds rate to 4.4% by December and to 3.4% by the end of next year, according to their median projections.

“We are in the none-and-done camp for the rest of this year,” Ed Yardeni, president of Yardeni Research, said in a research note to clients, noting “solid” gross domestic product growth. “There’s no rush for the Fed to ease, especially if the economy continues performing well.”

Robust corporate spending on artificial intelligence, high government spending and “lower sensitivity to Fed hikes for consumers and firms with lock-in low interest rates” have sustained economic growth, Torsten Sløk, chief economist at Apollo Global Management, said Monday.

“Now the Fed is cutting rates, which is boosting growth and inflation further,” he said in a note to clients. “Combined with very easy financial conditions, the bottom line remains that rates will stay higher for longer.”

During the past week traders in interest rate futures slashed from 37% to zero the probability that the Fed will trim the federal funds rate by a half percentage point at its next scheduled meeting on Nov. 6-7, according to the CME FedWatch Tool. They see 87% odds of a quarter-point easing.

After slowing inflation toward their 2% target, policymakers in recent months have focused more on their second mandate to ensure maximum employment.

Yet several forces may rekindle inflation, including wage increases for longshoremen, gains in energy prices due to the Israel-Iran conflict and the cost of rebuilding following the destruction from Hurricane Helene and other catastrophic storms, Yardeni said.

“The Fed’s ‘mission accomplished’ 50 bps [basis points] rate cut on Sept. 18 may prove to be premature if services inflation remains sticky and goods inflation heats up,” he said.

Inflation persists as the No. 1 challenge for small businesses, with 23% of those surveyed last month identifying price pressures — higher input and labor costs — as their most troubling problem, the NFIB said.