Dive Brief:

• CFOs trimmed their estimates for U.S. economic growth during the next 12 months to just 1%, with one out of four predicting recession during the period, according to a second-quarter survey by the Federal Reserve Banks of Richmond and Atlanta.
• The U.S. debt-ceiling agreement this month buoyed optimism among CFOs but “did not change expectations of financial decision-makers for slower GDP [gross domestic product] growth in the next year,” Richmond Fed economist Sonya Ravindranath Waddell said in a statement. “Small firms also seem to be experiencing a much more challenging environment with respect to revenue growth and financing than large firms.”
• Nearly 40% of small companies said a credit squeeze will likely prompt a cut to business spending, the Fed district banks said. On a brighter note, CFO concerns about inflation and worker availability eased compared with the first quarter, according to the survey of more than 300 financial leaders conducted with Duke University’s Fuqua School of Business.

Dive Insight:

The Fed survey aligns with findings from the U.S. Chamber of Commerce that rising interest rates have prompted half of small businesses to postpone growth plans. Seventy three percent of small firms reported challenges in borrowing because of credit tightening by banks, according to a second-quarter survey by the chamber and MetLife.

Banks expect to raise credit standards for all types of loans during the remainder of this year, the Fed said last month, noting that stresses in the banking system beginning in March compelled lenders to sharpen credit terms during the first quarter. Demand for loans fell during the period.

When explaining the reasoning behind plans to pull back credit, “banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers' collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position and deposit outflows,” the Fed said in a report on its quarterly Senior Loan Officer Opinion Survey.

CFO pessimism conflicts with revisions on Thursday to first quarter economic data and recent signs that the U.S. expansion remains robust even though the Fed since March 2022 has hiked the federal funds rate by 5 percentage points in its most aggressive fight against inflation in four decades.

GDP increased 2% during the first quarter, the Commerce Department said Thursday, a revision from an estimate of 1.1% published in April. Moreover, consumer spending rose 4.2% during the period, a revision from 3.7%.

Data capturing economic performance in recent weeks has also defied predictions that a downturn is imminent. Consumer confidence, durable goods orders and the pace of layoffs have all outshone forecasts.

Seventy-one percent of small business owners expect revenue to rise in the next 12 months, and 47% anticipate hiring more staff during the period, the chamber said.

“What you see is stronger-than-expected growth, a tighter-than-expected labor market and higher-than-expected inflation,” Fed Chair Jerome Powell said Wednesday in Sintra, Portugal, citing data from the last three months.

Referring to Fed officials who attend meetings of the Federal Open Market Committee, Powell said Thursday that “a strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year.”

Inflation persists at more than twice the Fed’s 2% target despite rapid monetary tightening.

“Inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go,” Powell said at a Banco de Espana conference in Madrid.