Dive Brief:

• Confidence among small businesses slumped to a decade low last month amid gloomier expectations for sales, earnings and economic growth, the National Federation of Independent Business said Tuesday.
• In one sign of the bleak outlook, just 19% of small businesses plan capital expenditures during the next three to six months — 1 percentage point above the proportion early in the pandemic in April 2020.
• At the same time, the share of small businesses that flagged difficulty obtaining credit declined, suggesting a partial recovery in credit availability since the failure of Silicon Valley Bank in March. The tight labor market and inflation continued to rank as the top concerns for owners of small businesses last month, the NFIB said.

Dive Insight:

The future cost and availability of credit is one of the most pressing unknowns for businesses and households, according to economists and policymakers. Lenders and credit markets since March have reeled under banking system stress as the Federal Reserve pressed on with the most aggressive monetary tightening in four decades.

“We’ve seen those tightening credit conditions,” New York Fed President John Williams said Tuesday. Since March 2022 the Fed has raised the main interest rate from near zero to a range between 5% and 5.25%.

Banks expect to sharpen credit standards for all types of loans during the rest of 2023, the Fed said Monday, noting the impact from banking turmoil in the first quarter. Demand for loans fell during the period.

Referring to the pullback in credit since March, Williams said, “one question is, how big an effect does it have on jobs, on the economy and on inflation?” Fed Chair Jerome Powell and other central bank officials have voiced the same uncertainty in recent weeks.

“Even banks that are very healthy and strong are seeing their cost of funding go up,” Williams said in response to questions after a speech in New York.

“I’m sure there are banks who are thinking, ‘Well, given what happened, I’m going to be more conservative, I’m going to maybe hunker down,’” he said. “That’s how that can spill over into the availability of credit.”

Differing from a forecast in March by Fed economists, Williams predicted that the economy will avoid recession in 2023.

“As tighter monetary policy continues to take effect, I expect real GDP [gross domestic product] to grow modestly this year, with growth then picking up somewhat next year,” he said in his speech.

Inflation will probably ease to 3.25% this year and to the Fed’s 2% goal during the next two years, according to Williams, who is also a vice chair of the central bank.

“Inflation remains too high,” he said, adding “the Federal Reserve is committed to bringing inflation down.” Differing from predictions by some investors and market analysts, Williams said he believes the central bank will not reduce the federal funds rate this year.

Unemployment will probably increase to between 4% and 4.5% during the next 12 months after matching a 54-year low of 3.4% in April, he said.

Among small businesses last month, the proportion that reported positive profit trends fell to a net negative 23%, 5 percentage points less than in March, the NFIB said.

A net negative 5% of owners viewed inventory last month as too low, 6 percentage points less than in March, the NFIB said. “This suggests stocks are now too large relative to expected sales.”

Indeed, the net percentage of small business owners expecting higher sales volumes fell 4 percentage points to a net negative 19%, the NFIB said.