MNI INTERVIEW: Credit Tightening To Crimp US Small Firm Hiring

Small U.S. businesses are set to create hundreds of thousands fewer jobs as a result of tighter lending conditions following the March collapse of Silicon Valley Bank, which in the long run will make America's economy less dynamic and more concentrated, Federal Reserve Bank of Atlanta economists Salome Baslandze and Jonathan Willis told MNI.

Firms with fewer than 500 employees accounted for the majority of job growth during the pandemic and the recovery, hiring a third of the net 1.5 million people who became employed between March 2020 and March 2022. Yet they will also bear the brunt of the negative impact on job creation as a result of crimped bank lending, whereas their large counterparts can keep growing by accessing capital markets and other sources of nonbank funding, Baslandze and Willis said in an interview.

A 1 percentage point tightening in bank credit supply is associated with an 11% decline in small businesses' net job creation rate, Baslandze and Willis and bank colleagues Camelia Minoiu and Veronika Penciakova estimated by analyzing the supply-side impact of credit contraction on small business employment at the state level.

"One percentage point is about a third of the tightening that happened during the Great Recession and that implies a loss of 285,000 jobs from March 2023 to March 2024," assuming job growth would have continued at the same rate as the previous year, Baslandze said.

CONSERVATIVE ESTIMATE

"If anything, we're showing a more conservative scenario, because the net percentage of banks tightening lending standards on commercial and industrial loans from the Senior Loan Officers survey shows the tightening is more than a third of what we saw in the Great Recession -- maybe about half," Baslandze added.

The net proportion of banks that reported tightening lending standards spiked to 71% in the July 2020 survey, fell to an all-time low in 2021 and has increased steadily since the Fed began raising interest rates. In July 2023, in the aftermath of the regional banking debacle, it was 51%, compared to a peak of 84% in 2008. The survey does not capture the degree of tightening, which could be relevant to the analysis, Willis noted. (See: MNI INTERVIEW: Fed Likely Overtightened-Ex-Boston Fed's Fuhrer)

Lower demand for credit would reduce employment growth even further, Baslandze said. A net 8% of small businesses surveyed by the National Federation of Independent Businesses last month said their last loan was harder to get than in previous attempts and 65% said they were not interested in a loan. The NFIB says the average rate paid on short maturity loans jumped to 9.8% in September.

BIG FIRMS

The Atlanta Fed analysis also confirmed there was little impact from the bank credit channel on large firms hiring during the Great Recession, Willis said. "The biggest firms have plenty of cash on hand, they’re not reliant on banks and can go to other parts of the market for borrowing." (See: MNI INTERVIEW: Higher Rates Finally Begin To Bite US Firms) That might help explain why the overall labor market remains so strong -- the economy created a surprising 336,000 new jobs last month.

The economists characterized the figures they've come up with as a "thought experiment" that tries to isolate the credit supply impact. Still, they worry the extra pressure on smaller firms will cause the country to be more stagnant and less competitive over the long run.

"Business creation and the dynamism of small and young firms is crucial for a healthy economy," Baslandze said. "As a result this tightening that affects particularly smaller firms is worrisome down the road for innovation and productivity growth."