Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.
Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.
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May 25, 2023
Credit Conditions Are Tightening. Are Firms Feeling the Pinch?
The recent banking turmoil has many folks talking about a credit crunch. Indeed, according to the Federal Reserve's latest Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), just under half of banks surveyed have been tightening their lending standards, raising concerns that the flow of credit to the broader economy will choke off businesses' ability to engage in expansionary investment and fund operations (see figure 1).
Given the recent turmoil and reports of a constrained flow of credit, in mid-April (April 10–21) we posed a series of special questions to panelists in our Survey of Business Uncertainty (SBU)—a national, monthly survey that gathers responses from private, nonagricultural employer firms across all major industries and firm sizes—to gauge the demand side of the credit equation and see if firms are feeling the squeeze. What we found was quite interesting. Only about a quarter of our firms anticipate applying for new credit (or rolling over an existing line of credit) during the next 12 months, down from about a third of firms over the past year (see figure 2). Most firms do not anticipate seeking funding, and about 60 percent of respondents indicated having enough cash on hand to execute on their current plans. Additionally, about one-third of these firms said they did not want to accrue further debt. Put simply, if a pending "credit crunch" is going to send the economy into a tailspin, it might take a while for Main Street businesses to feel it.
In response to a backward-looking question on whether firms have recently applied for credit (or extended an existing line of credit), roughly a third of our panel indicated submitting a credit application during the past 12 months. About two-thirds of those applications were during the prior three months, with the overwhelming majority (89 percent) receiving the entire amount requested. Looking forward, only around 25 percent of the panel anticipates applying for credit during the next 12 months.
There are some differences across firm size embedded in these results. A greater share of large firms (those with 250 employees or more) applied for credit during the past year—roughly 40 percent, compared to about 30 percent of small firms, with a similar disparity over the year-ahead horizon. When looking across broad industrial classifications, the share of firms that sought credit during the past year was highest among firms in construction, real estate, mining, and utilities (42 percent) and in retail and wholesale trade (42 percent).
We can also relate these special question results to our core survey outcomes to see if firms that experienced or anticipate strong employment and sales revenue growth were disproportionately those that sought credit. A surprisingly similar share of the fastest-growing firms in terms of sales revenue compared to slower-growing firms submitted a credit application during the past year. For example, 35 percent of firms in the top tercile of sales revenue growth during the past 12 months sought credit, statistically indistinguishable from the 33 percent of firms in the lower two terciles of sales revenue growth.
Although the majority of firms do not anticipate applying for credit in the next 12 months, to the extent that turmoil in the banking system disproportionally affects smaller banks, it is also more likely to crimp smaller firms' access to credit. In our results, roughly 60 percent of large firms' most recent credit application was at a large bank (see figure 3). Smaller firms, on the other hand, are more likely to bank with small banks (44 percent, compared to just 17 percent of larger firms), which could increase smaller firms' exposure to a contraction in bank lending.
Among the one-quarter of firms seeking new credit, the rationale for why these firms plan to borrow sheds further light on the potential impact that tightening credit conditions may have on economic growth. In our April survey period, we posed a follow-up question to the one-quarter of firms that plan to apply for credit: "Looking ahead to the next 12 months, for what purpose does your firm plan to seek credit financing?" The question allowed respondents to select all applicable reasons from a list that included options such as expanding business, pursuing new opportunities, or acquiring business assets; meeting operating expenses; refinancing or paying down debt; and replacing capital assets or making repairs.
The results shown in figure 4 suggest that just over half of those anticipating applying for credit financing—or roughly 14 percent of the overall SBU panel—plan on using those funds to expand their business, pursue new opportunities, or acquire business assets. Another 27 percent (just under 7 percent of the overall panel) plan to replace capital assets or make repairs, and 25 percent (roughly 6 percent of the overall panel) anticipate seeking credit to refinance or pay down existing debt. To some extent, tighter credit conditions could affect these plans. However, the firms arguably most vulnerable in the event of a significant credit contraction—those anticipating seeking credit to meet operating expenses—amount to just a little less than 6 percent of our panel.
Given that the overwhelming majority of firms in the SBU have not sought credit in the past year and do not anticipate seeking credit in the next 12 months, one obvious question is: why not? The results in figure 5 detail the reasons firms gave for why they either didn't plan to apply for credit, or why they don't plan to.
For almost half the firms in our panel, the answer was that the firm had (or has) enough cash on hand to follow through on their current (anticipated) slate of activities. Looking at the year ahead, 60 percent of the 405 firms that received this follow-up question indicated they weren't seeking credit because they have enough cash on hand to cover their expected activity during the next 12 months. Out of a total of 540 responses, this amounts to 45 percent of the panel. Another third of the firms not planning on seeking credit said they did not want to accrue further debt. And—perhaps especially interesting to those attuned to monetary policy—just 21 percent of those not planning on seeking credit financing in the next 12 months (or 16 percent of our overall panel) indicated that interest rates are too high for them to consider taking on additional credit financing.
These results are consistent with longer trends in corporate financing. A recent article out of Northwestern's Kellogg School of Management reports that firm's cash holdings have risen sharply since 2000—from $1.6 trillion to $5.8 trillion. The article cites uncertainty, tax strategy, and the need for some firms (especially those in the intellectual property space) to be nimble. After-tax corporate profits have risen sharply since the early 2000s, rising from around 5 percent of nominal gross domestic product (GDP) to roughly 10 percent by late 2019. Since the onset of the pandemic, they've only moved higher—reaching a peak of 12.3 percent of GDP in the second quarter of 2021.
Our results suggest that any significant tightening in credit conditions that has occurred in the wake of recent bank failures may take some time to impact the broad swath of Main Street businesses, as just 25 percent of firms in the SBU anticipate seeking credit financing during the next 12 months. And the majority of firms not seeking credit financing report having enough cash on hand to cover their plans during the next year. Indeed, although the SLOOS indicates that, on balance, the share of banks tightening credit has increased markedly, only a very small fraction of banks have tightened lending standards "considerably." To be clear, a significant and protracted contraction in the supply of credit would certainly constrain firms' ability to sustain and grow their businesses. However, our results do suggest that firms' demand for credit is expected to wane relative to the year prior and many firms report having ample cash on hand to move forward on business plans, perhaps splashing a bit of cold water on near-term fears of a looming credit crunch.
March 2, 2017
Gauging Firm Optimism in a Time of Transition
Recent consumer sentiment index measures have hit postrecession highs, but there is evidence of significant differences in respondents' views on the new administration's economic policies. As Richard Curtin, chief economist for the Michigan Survey of Consumers, states:
When asked to describe any recent news that they had heard about the economy, 30% spontaneously mentioned some favorable aspect of Trump's policies, and 29% unfavorably referred to Trump's economic policies. Thus a total of nearly six-in-ten consumers made a positive or negative mention of government policies...never before have these spontaneous references to economic policies had such a large impact on the Sentiment Index: a difference of 37 Index points between those that referred to favorable and unfavorable policies.
It seems clear that government policies are holding sway over consumers' economic outlook. But what about firms? Are they being affected similarly? Are there any firm characteristics that might predict their view? And how might this view change over time?
To begin exploring these questions, we've adopted a series of "optimism" questions to be asked periodically as part of the Atlanta Fed's Business Inflation Expectations Survey's special question series. The optimism questions are based on those that have appeared in the Duke CFO Global Business Outlook survey since 2002, available quarterly. (The next set of results from the CFO survey will appear in March.)
We first put these questions to our business inflation expectations (BIE) panel in November 2016 . The survey period coincided with the week of the U.S. presidential election, allowing us to observe any pre- and post-election changes. We found that firms were more optimistic about their own firm's financial prospects than about the economy as a whole. This finding held for all sectors and firm size categories (chart 1).
In addition, we found no statistical difference in the pre- and post-election measures, as chart 2 shows. (For the stat aficionados among you, we mean that we found no statistical difference at the 95 percent level of confidence.)
We were curious how our firms' optimism might have evolved since the election, so we repeated the questions last month (February 6–10).
Among firms responding in both November and February (approximately 82 percent of respondents), the overall level of optimism increased, on average (chart 3). This increase in optimism is statistically significant and was seen across firms of all sizes and sector types (goods producers and service providers).
The question remains: what is the upshot of this increased optimism? Are firms adjusting their capital investment and employment plans to accommodate this more optimistic outlook? The data should answer these questions in the coming months, but in the meantime, we will continue to monitor the evolution of business optimism.
June 28, 2012
Young versus mature small firms seeking credit
The ongoing tug of war between credit supply and demand issues facing small businesses is captured in this piece in the American Prospect by Merrill Goozner. Goozner asks whether small businesses are facing a tougher borrowing environment than is warranted by current economic conditions. One of the potential factors identified in the article is the relative decline in the number of community banks—down some 1,124 (or 13 percent of all banks from 2007). Community banks have traditionally been viewed as an important source of local financing for businesses and are often thought to be better able to serve the needs of small businesses than large national banks because of their more intimate knowledge of the business and the local community.
The Atlanta Fed's poll of small business can shed some light on this issue. In April we reached out to small businesses across the Sixth Federal Reserve District to ask about financing applications, how satisfied firms were that their financing needs were being met, and general business conditions. About one third of the 419 survey participants applied for credit in the first quarter of 2012, submitting between two and three applications for credit on average. As we've seen in past surveys (the last survey was in October 2011), the most common place to apply for credit was at a bank.
For the April 2012 survey, the table below shows the average success of firms applying to various financing sources (on a scale of 1 to 4, with 1 meaning none of the amount requested in the application was obtained, and 4 meaning that the firm received the full amount applied for). The table also shows the median age of businesses applying for each type of financing.
The results in the table show that for credit applications, Small Business Administration loan requests and applications for loans/lines of credit from large national banks tended to be the least successful, whereas applications for vendor trade credit and commercial loans/line-of-credit from community banks had the highest average success rating.
Notably, firms applying for credit at large national banks were typically much younger than firms applying at regional or community banks. If younger firms generally have more difficulty in getting credit regardless of where they apply, it could explain why we saw less success, on average, among firms applying at larger banks.
To investigate this issue, we compared the average application success among young firms (less than six years old) that applied at both regional or community banks and at large national banks, pooling the responses from the last few years of our survey. The credit quality of borrowers is controlled for by looking only at firms that applied at both types of institutions. What we found was no significant difference in the average borrowing success of young firms applying for credit across bank type—it just does seem to be tougher to get your credit needs met at a bank if you're running a young business. Interestingly, we also found that more mature firms were significantly more successful when applying at regional or community banks than at large national banks—it seems to be relatively easier for an established small business to obtain requested credit from a small bank.
While this analysis did not control for other factors that could also affect the likelihood of borrowing success, the results do suggest that Goozner's question about the impact of declining community bank numbers on small business lending is relevant. If small businesses are generally more successful when seeking credit from a small bank, will an ongoing reduction in the number of community banks substantially affect the ability of (mature) small businesses to get credit? More detailed insights from the April 2012 Small Business Credit Survey will be available soon on our Small Business Focus website, and we will provide an update when they are posted.
By John Robertson, vice president and senior economist,
Ellyn Terry, senior economic research analyst, both of the Atlanta Fed's research department
August 26, 2011
Lots of ground to cover: An update
If you have to discuss a difficult circumstance, I guess Jackson Hole, Wyo., is as nice as place as any to do so. This morning, as most folks know by now, Federal Reserve Chairman Bernanke reiterated the reason that most Federal Open Market Committee (FOMC) members support the expectation that policy rates will remain low for the next couple of years:
"In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years."
There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago.
Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012:
"For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017."
The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:
Attaining 3.5 percent growth by next year moves the CBO's date for closing the output gap up by about a year. On the other hand, a fall in output growth to an average of 3 percent per year moves the date for eliminating resource slack back to 2020. If growth remains below that—well, let's hope it doesn't.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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