Economic growth in the U.S. has slowed significantly in 2022, and that slow growth is expected to continue into next year. After shrinking slightly in the first half of this year, real gross domestic product rebounded in the third quarter to a 2.6% annual growth rate. However, according to Christopher J. Waller, a member of the Federal Reserve Board of Governors, this was just a temporary boost, and weak growth has returned in the last quarter of 2022 and will persist into 2023.
Consumer and business spending has softened, amid deteriorating business sentiment in most sectors of the economy, Waller said at the 59th Annual Economic Forecast Luncheon, Phoenix on Nov. 16. It’s not hard to understand why: inflation remains high, which people notice every day at the gas pumps and grocery stores. Further, as the Fed tries to curb inflation to its 2% target, it has raised interest rates, which raises borrowing costs for businesses and consumers alike.
Inflation is the result of pent-up demand arising from after COVID-related lockdowns, supply chain issues, increased labor costs, and rising gas prices, among other factors. Stimulus money put more cash in the hands of consumers, who naturally spent it, thereby spurring inflation. The slowed economic growth is a sign that the monetary policy of raising interest rates, which has been in effect since late 2021, is beginning to work but will take time.
The latest consumer price index (CPI) report found deceleration in the pace of increasing prices but, according to Waller, it is way too early to deduce that inflation is headed sustainably down. It is feasible that the Fed will aggressively try to reduce it by raising interest rates again. After all, during the last nine months, the FOMC have raised the target range for the federal funds rate from near zero to 3-3/4 to 4%, a historically rapid pace of increases.
All of this puts small business owners in a tough spot. On one hand, they are suffering because of the tight labor market, which has driven up wages, and increasing costs of goods sold. Many small business owners feared raising prices further, since that can have a negative effect on demand, but at the same time, their margins have been squeezed.
These economic realities increase the challenges small companies searching for working capital in the present and for future growth plans. The latest Biz2Credit Small Business Lending Index found that business loan approval rates at big banks dipped to 14.7%, a setback for the second month in a row. Even as the economy has steadily rebounded from pandemic lockdowns, approval percentages are still roughly half of what they were before COVID hit the United States.
Additionally, in February 2020, small banks approved more than half of the business funding requests they received. Now that figure is 21.2%. Interest rates are higher, and loans are harder to get, in part because cost structures have whittled away profitability of smaller companies.
Half of small businesses (50%) say inflation is the biggest challenge facing small business right now, according to the U.S. Chamber of Commerce. The chamber also reported that in order to cope with inflation, 7 in 10 small businesses raised prices in response to inflationary pressures, followed by those who said they have taken out a loan (40%), reduced staff (37%), or reduced the quality of their products or services (31%).
More than three-quarters of small business owners (76%) say they have a plan to adapt to a changing economy, and a large majority (61%) believe the economy changes more quickly now than it did before. A sizeable percentage (40%) say they are very concerned about the impact of rising interest rates have on their business.
There is no doubt that times are tough for small business owners right now. It’s important to note the resilience of America’s entrepreneurs. They have endured an unprecedented pandemic followed by record inflation. The strong are indeed surviving. The the holiday season is upon us, and consumers are still willing to spend their money. Even if sales sales are strong, higher costs will eat into profitability. It’s too early to say things are merry and bright this holiday season, but if labor, fuel, and commodity costs don’t start heading downward, small businesses may find themselves in a crunch during the coming year.