Yahoo Finance Fed’s Higher-for-Longer Stance Hits Firms That Expected Rate Cut
(Bloomberg) -- American businesses and consumers started the year thinking interest rates would finally come down, making big plans to buy equipment or a house. Now all of that is on hold, slowing large swaths of the economy for the foreseeable future.
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In Michigan, a maker of cutting tools has delayed as much as $1 million in spending this year on new equipment. In Atlanta, a woodworking machine maker says some customers are trying to extend the life of an apparatus.
When progress on inflation stalled early this year and Federal Reserve officials decided to keep rates at a 23-year high for longer, it forced companies to rethink investments in capital expenditures, inventory and hiring. On Wednesday, policymakers are expected to keep borrowing costs steady again after their two-day policy meeting in Washington.
For businesses, the pain is showing up in data. S&P Global Market Intelligence projects capital investments in manufacturing will rise by only 3.9% this year, down from a January estimate of 6.7%. US business bankruptcy filings increased by more than 40% during the past year through the end of March, while personal filings rose 15%, according to the Administrative Office of the US Courts.
In a June 5 report from the Institute for Supply Management, a majority of respondents in the services sector indicated that inflation and current interest rates impede improving business conditions. That’s after reporting feeling optimistic in January about the potential impact of interest-rate cuts, Anthony Nieves, chair of the ISM Services Business Survey Committee, said in statements.
The Fed’s decision to keep interest rates higher for longer than expected is also sowing uncertainty around the world, while further squeezing debt-strapped consumers and delaying home purchases.
Delayed Equipment Purchases
“You definitely have to pull back the reins when interest rates are high,” said Patrick Curry, president of the Michigan-based Fullerton Tool Co. “We have to hold off on some of that and try to make best with the existing equipment we have.”
With two facilities in Saginaw, Michigan and one in California that make cutting tools for the aerospace, automotive and medical fields, among others, 81-year-old Fullerton has delayed about $1 million in spending on equipment upgrades and customers are not buying as much equipment, Curry said.
The ISM’s May 15 economic forecast showed that company leaders expect only a 1% increase in capital outlays this year, down from its December 2023 estimate of almost 12%.
Investors are pricing in about 1.5 rate cuts this year, assigning roughly even odds on a first reduction in September, according to futures.
If the Fed begins cutting rates around then, business and software investment should pick up in the latter part of the year, Equipment Leasing and Finance Association Chief Executive Leigh Lytle said in a release.
Just north of Atlanta, there’s still demand for the heavy saws and drills used to make cabinets and furniture, said Blair Chandler, manager of equipment finance and leasing at SCM North America, a woodworking machine maker.
While larger clients are still moving ahead with purchases, the company’s smaller customers are trying to extend the life of old equipment, Chandler said.
“I’ve seen smaller firms throwing money at keeping their equipment running, and they’re having to talk themselves into buying this new equipment,” she added.
Spiking Borrowing Costs
Small businesses are also buckling under the strain of high loan rates, persistent inflation and wages, which are still growing at more than 4% a year, according to government data through May.
Some 6% of small firms said financing was their top business problem in May, the highest share in nearly 14 years, according to the National Federation of Independent Business. Default rates on loans to small businesses in April hit an annual rate of 3.2%, matching their highest level in at least a decade, according to the credit bureau Equifax.
Companies are also feeling the pinch of adjustable-rate mortgages.
Loan rates for the Gastamo Group, a Denver-based restaurant company, will double to as much as 8% starting in two years. That’s no small pocket change: The company has loans of as much as $3 million on some of its properties, said Peter Newlin, the company’s chief vision officer.
Even if the loans don’t reset immediately for another year or more, “they’re coming,” Newlin said.
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Meanwhile, rent is spiking by as much as 30% at the properties Gastamo Group leases, which Newlin attributes to landlords passing along their own higher borrowing costs. That comes as customers are cutting back on spending following a banner year in 2023, Newlin said.
In Tampa, Florida, Dilip Kanji, longtime owner of hotel company Impact Properties, has paused plans for three new hotels until borrowing costs drop. Interest rates on construction loans have shot up from around 5% to up to 9%. Given that Kanji expects to finance around $42 million of the combined $60 million total cost, that’s a hefty increase.
Like other hoteliers, he has renewed loans on some of his properties at much higher rates and can shoulder the cost for now. But he’s going to play it safe. “We’re just waiting for a little breathing room on debt to get those projects going.”
The Pain Continues
For US households, debt reached a record $17.7 trillion in the first quarter of 2024, according to a recent report from the New York Fed.
Consumers think their financial pain will continue. Only about a quarter of respondents in the University of Michigan’s consumer sentiment survey now expect interest rates to fall this year, versus 32% in April.
Among companies, expectations are equally grim. On June 2, the ISM manufacturing report showed further contraction of US factory activity in May.
On a call with reporters after the release of the report, Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said: “Uncertainty is the devil of business, and that’s exactly where we’re sitting today.”
--With assistance from Claire Ballentine and Marie Monteleone.
(Updates with latest NFIB data in second paragraph under “Spiking Borrowing Costs” and in third graphic)
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