The credit crunch persists for small firms, and that could drag on job growth, Fed Chairman Ben Bernanke told the Economic Club of New York in a speech Monday. Small businesses’ continued trouble borrowing from banks contrasts with big companies that borrow in the capital markets, which Bernanke said have returned to normal.
The Fed chairman’s wide-ranging talk described an economy that had averted disaster but still faced two big challenges: tight credit for small and mid-size firms and households, and high unemployment.
Here are some excerpts of Bernanke on small business:
In particular, borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty. Other borrowers, such as state and local governments, have experienced improvement in their credit access as well.
However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices shows that banks continue to tighten the terms on which they extend credit for most kinds of loans—although recently the pace of tightening has slowed somewhat. … For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms. The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.
That constriction of bank lending could translate to weak job growth in the recovery, Bernanke said.
In addition, difficulties in obtaining credit could hinder the expansion of small and medium-sized businesses and prevent the formation of new businesses. Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth.
Banks’ reluctance to lend will limit the ability of some businesses to expand and hire. I expect this situation to normalize gradually, as improving economic conditions strengthen bank balance sheets and reduce uncertainty; the fallout for banks from commercial real estate could slow that progress, however. Jobs are likely to remain scarce for some time, keeping households cautious about spending. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. Nevertheless, as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.
In terms of access to credit, small businesses and big businesses are again facing two different recoveries. (Hat tip to WSJ’s Real Time Economics blog.)