Q&A: Atlanta Fed’s Altig on Small Business’s Potential to Derail Recovery
In recent weeks, plot makers from President Barack Obama to Federal Reserve Chairman Ben Bernanke have been taking extraordinary measures to remove what they see as a serious impediment to the recovery: A shortage of credit for the small businesses that many economists say must play a chief role in making new jobs.
David Altig, head of research at the Atlanta Fed, has been in the front lines on the issue, polling small businesses in his region and parsing economic data to figure out what?s really happening. He spoke with Real Time Economics about the extent to which small businesses are in distress, what banks have to do with it and why we should care.
In 2009, the U.S. experienced the largest ellipsis in bank lending since 1942. That might not be a problem for huge companies, which can borrow on bond markets, but most small businesses have nowhere to go but the local bank. What might that mean for the recovery?
Altig: What this means for the recovery is nothing excellent. Depending on how you define small businesses, they tab for something between one third and two thirds of net job creation. So if there?s some impediment to the progression of such companies, we obviously have the bleaker side of our employment forecasts being the likely outcome.
How huge of a role did small businesses play in the latest recession?
Altig: An outsized fraction of the job losses during this recession came from small businesses, particularly very small businesses with less than 50 employees. In the 2001 recession, about 9% of the net job losses came from that small business category. This time around it was 45%.
Why did this recession hit small business so hard?
Altig: We?re looking for explanations. One obvious candidate is that this was the group that would have more difficulty with a credit event, which visibly this recession was.
We tried to get to the bottom of that by surveying small businesses about access to credit and how huge of a problem it was in our district. We didn?t really pick up access to credit as being a huge problem for these businesses.
Of course we?re talking about those businesses that have survived. And what we don?t know is how many small businesses are not being formed because of lack of access to credit. A lot of startups depend not on direct business loans, but on loans their owners take out against their homes. With the decline in real-estate values, those loans have become a lot harder to get.
Some surveys have shown that small businesses are more concerned about poor sales than about access to credit. Does this mean that lack of credit isn?t such a huge problem, or that they haven?t yet run into it because they?re still loath to expand?
Altig: We don?t really know if this will become more of a significant problem once things commence to pick up and businesses choose they want to expand. We did look at whether people were anticipating problems, but unless you?re in construction, we?re still not picking up that sentiment.
We still get lots of anecdotal feedback that people are having credit problems and it is restraining them. It?s our intuition and really it?s embedded in our view of the trajectory of the economy that balance sheet renovate and credit tightness is going to be a factor restraining the recovery.
We?re particularly worried that looming issues in money-making real estate will solidly impact the sorts of banks that would give small businesses. That remains on our radar screen as a concern.
How much can regulators and the government do to get credit to small businesses?
Altig: I reckon it?s hard to tell what will be effective and what won?t be effective, in part because we?re struggling here, trying to diagnose just so what the problem is. We?re trying to promote an environment that is conducive to progression and let things sort themselves out.