Insights from the 10/10/23 Commercial Pulse Report – Retail Sales Outlook

Published: October 23, 2023 by Marsha Silverman

The perception of economic conditions among small business owners grows more pessimistic with the NFIB optimism index still well below the 49-year average and a persistent belief that access to borrowing is likely to get worse.

With inflation coming in at 3.7%, still stubbornly above the Fed’s 2% target, it is possible there will be more rate hikes in the coming months, which will make the cost of borrowing even higher. At the same time, small businesses are facing higher financing costs, the cost of labor continues to increase as workers can demand higher wages as employers struggle to find qualified workers for all their open positions.

Meanwhile, there are still many signs pointing to a strong economy despite these challenges. Unemployment is still very low by historical standards as noticed by employers trying to fill open positions. Consumer spending continues to be strong with retail sales experiencing their sixth month-over-month gain in a row.

As for credit tightening, both businesses and lenders report tightening but it may not be as bad it seems. Regular borrowing by small businesses on a monthto-month basis has recovered to pre-pandemic levels suggesting that even as borrowing costs are higher, small businesses still do have access to credit. New term loans are showing the average loan amount increasing and the number of new originations is only down 3% from the last quarter. Revolving accounts are faring less favorably but are also more likely to have variable interest rates that are sensitive to the increase in Fed rates.

What I am watching:

The Fed will have a difficult decision to make about interest rates at their next meeting on November 1 and in the coming months. Inflation has come down dramatically from its peak, but progress has stalled in the last few months.

Unemployment is still very low and consumer spending is strong, but consumer and small business optimism is down. Housing costs are very high and high interest rates have slowed home sales as the cost to enter is high and existing homeowners are reluctant to sell. All these mixed signals make the path forward to achieve the coveted soft landing difficult to navigate and different Fed chairpersons have indicated different ideas on the matter. How the economy continues to fair in the coming holiday season and the response of the Fed to those conditions will be very closely followed as a result.

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