MNI INTERVIEW: Higher Rates Finally Begin To Bite US Firms

Tighter monetary policy has finally made it to the top of U.S. corporate finance chiefs' list of worries, a sign that firms are at last feeling the effects of higher interest rates even if they still expect hiring and revenue growth to rebound next year, the CFO Survey director and Duke University economist John Graham told MNI.

Difficulty hiring and retaining workers had dominated the list of most pressing concerns for a number of quarters but has finally been displaced by monetary policy, according to the latest survey of CFOs in late August and early September by Duke University’s Fuqua School of Business and the Federal Reserve banks of Atlanta and Richmond. Labor quality and availability remains a close second, followed by cost pressures and demand.

About 40% of CFOs said high interest rates have already prompted their companies to pull back on capital and noncapital spending. If rates were to remain at their current level for another year, another 7% said they would curtail spending. FOMC projections last week showed the benchmark interest rate staying above 5% through the end of 2024, down slightly from the current 5.25%-5.5% range.

"We've been asking companies when rates were low: if the Fed were to raise rates by three percentage points, would that affect your spending? And resoundingly it was no. So it was a real open question how much monetary policy actually affects spending," Graham said in an interview. "It's taken quite a big increase -- as much as five percentage points to start to affect companies."

SOFT LANDING

A little over 30% of CFOs said they don't finance spending through borrowing or that their borrowing is not interest-rate sensitive, which partly explains why higher interest rates haven't had as much of an effect. Aside from monetary policy, about half of respondents said economic uncertainty is causing their firms to spend less.

CFOs overall still expect improvement next year with "moderately higher hiring" and a smaller wage bill, Graham said. They see employment growth rising to 4% from 1% this year, with revenue growth rebounding to 6% from 3% and wage and input costs falling. (See MNI INTERVIEW: Labor Hoarding Improves Odds Of US Soft Landing)

If rates were lower next year, "we could see more improvement," Graham said. (See MNI INTERVIEW: Fed's Wright Optimistic On Further Disinflation)

"We have seen this gradual flattening of optimism and slowing of business spending, especially due to higher interest rates, but never to the point where it's causing a recession this year," he said. "That suggests a soft landing."

HARDER ON SMALL FIRMS

Small companies are being affected somewhat more by the current high interest rate environment than their large counterparts, Graham said. That's largely to be expected because they have less of a cash buffer and pandemic-era fiscal supports may have been spent.

As opportunities to borrow at a reasonable rate become less available, "they've been relying more on their internal funds, basically been burning through their cash," Graham said.

"It's maybe not surprising, but not an intended policy outcome for the Fed."