11/ 30/ 2007
The big news these days seems to be a concern that credit markets have "seized up," that they will not function properly and that commercial-paper markets are frozen. Well, that may be the view from the 50th floor of a building on Wall Street, but it is not true on Main Street.
As has been the case for the past 15 years, only 3 percent of all owners identify financing as their No. 1 business problem (compared to more than 30 percent in the early 1980s). And more than 30 percent of owners report that all of their credit needs are being met, while fewer than 5 percent report the contrary. This is as high a satisfaction rate as the survey has recorded since the question was first asked in 1993. Nine percent said loans were harder to get than in 1993, a point or two higher than we have seen in the past decade, but nothing close to the 30 percent or higher readings in the early 1980s, when there really was a problem.
In short, there is no measurable credit problem at the street level, and all the wailing and moaning is coming from large greedy institutions that made bad bets and don't want to admit it (or take the losses on their books). Instead, they want the Fed to lower interest rates, which makes their bad investments look less bad. But isn't that just lipstick on the pig?
While big institutions are being bailed out, small banks may not have fared so well. Many loans made by banks are variable rate loans, so banks lost 50 basis points of revenue on those loans. If anything, that will make banks less willing to lend, not more willing. Owners with these variable priced loans are, of course, happy and hope for yet another cut from the Fed this year.
Did the Fed Action Help?
The NFIB Research Foundation survey data collected before and after the rate cut showed that owners dramatically reduced plans to hire and make capital outlays after the cut was announced. Instead of stimulating spending and hiring, the announcement was seen as bad news—a warning that the economy is worsening. Although the Small-Business Optimism Index for September was up one point, it would have been much higher had the last 12 days of the month continued at the same pace as the first 18 days. So, overall, September survey results were favorable: Optimism was up, job creation plans were stronger, only one in four owners reported unfilled job openings and capital spending plans rose. But all of these indicators fell after the Fed's announcement, reducing the willingness of small businesses to help grow GDP and create jobs.
The Inflation Challenge
Now the challenge for the Fed is to keep inflation low. The CPI inflation rate for the past 12 months is about 3 percent. So, if your income rose by 3 percent or less, you are losing ground. The core inflation rate is up 2.1 percent, still outside of the 1 to 2 percent range we believe the Fed is aiming for. But for the third quarter, the core inflation rate was 2.5 percent, so we're going in the wrong direction. The Fed rate cut was designed to stimulate spending. In simple terms, that means the Fed was printing money, which is exactly what you would not do when trying to dampen the rate of increase in prices. In the meantime, the inflation rate will continue to erode the value of your income and keep longer-term interest rates higher than they have to be.
Still, all in all, the economy will keep plugging along—unless they make a big mistake or two in Washington, which was a major source of our problems in the early 1980s, 1990s and 2001.
