Dive Brief:

• Confidence among small businesses last month fell deeper below a level that usually signals recession amid persistent inflation and a scarcity of qualified workers, the National Federation of Independent Business found in a survey.
• More than two out of five business owners (43%) reported difficulty filling job openings and 23% said inflation was their top business challenge, the NFIB said. The federation’s optimism index, a credible harbinger of recession since 1973, has sagged below its 49-year average for 21 months.
• “The long-anticipated recession, predicted by our traditional leading indicators, has not shown its face yet in the statistics,” the NFIB said, noting that unemployment remains low at 3.8%. “The economy is skating on thin ice — cracks have appeared — but there has been no significant crash through the ice.”

Dive Insight:

The economy — buoyed this year by robust hiring, strong consumer spending and solid business investment — has defied recession warnings by both private- and public-sector economists, including those at the NFIB, Federal Reserve and Conference Board.

Hiring soared last month by 336,000, far exceeding forecasts and validating recent signals from Fed policymakers that they plan to sustain high interest rates for a longer period than forecast in June. The unemployment rate remained at 3.8%.

Gross domestic product during the third quarter likely rose at a 5.1% annual rate, the Atlanta Fed said Tuesday, increasing its estimate from 4.9% on Oct. 5.

“The economy is just really booming,” Fed Governor Christopher Waller said Wednesday, noting the third quarter growth surge.

Atlanta Fed President Raphael Bostic said that he sees small odds of a downturn.

“I have the economy slowing down, but not moving into a recessionary mode because there’s lots of momentum,” he told a convention of the American Bankers Association on Tuesday. “I talk to businesses all the time, and they’re telling me things are actually starting to move back to a more normalized pace, and that means supply and demand are getting into balance.”

Fed economists in preparation for a Sept. 19-20 gathering by policymakers upgraded their outlook for the economy compared with a July forecast, according to meeting minutes released Wednesday.

“Consumer and business spending appeared to be more resilient to tight financial conditions than previously expected,” the minutes said.

Still, Fed economists “projected that real GDP growth in 2024 through 2026 would be slower, on average, than this year and would run below the staff’s estimate of potential output growth, restrained over the next couple of years by the lagged effects of monetary policy actions,” according to the minutes.

The central bank, aiming to quash inflation, has pushed up the federal funds rate since March 2022 from near zero to a range between 5.25% and 5.5%, a 22-year high, in the most aggressive tightening in four decades.

Policymakers unanimously decided last month not to change the benchmark rate. At the same time, Fed officials differed over whether they should further increase borrowing costs later this year. They are scheduled to meet in two-day meetings beginning on Oct. 31 and Dec. 12.

“A majority of participants judged that one more increase in the target federal-funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted,” according to the minutes.

Fed officials forecast that the central bank will likely increase the federal funds rate to 5.6% by December before trimming it to 5.1% by the end of next year, a half point higher than a 4.6% estimate in June, according to median projections released Sept. 20.

“We are likely close to, and possibly at, the peak of this tightening cycle, with the risk of inflation remaining persistently high more closely balanced with the risk of slowing activity more than needed to achieve price stability,” Boston Fed President Susan Collins said Wednesday.

Still, the Fed may need to sustain high borrowing costs in order to restore its 2% inflation target, she said in a speech at Wellesley College.

“I expect we’ll need to hold rates at restrictive levels for some time — until we see evidence that inflation is on a sustained path back to 2%,” she said. “And while we are likely near, and could be at, the peak for policy rates, further tightening could be warranted depending on incoming information.”

As interest rates rose last month, credit conditions worsened for small businesses, according to the NFIB survey.

The proportion of businesses that reported their credit needs were met fell to 23%, a four-percentage-point decline compared with August, the NFIB said. Larger proportions of respondents also said that loans were harder to obtain and financing was their biggest challenge.