According to new research, the negative sentiment among consumers about the economy in 2023 may be attributed to higher borrowing costs, which are not captured by traditional inflation gauges. The cost of money, including interest rate hikes, has increased interest costs for credit cards, cars, and more. The research suggests that consumer sentiment measures may improve as the Federal Reserve starts cutting interest rates.
Per Bank of America, Small business credit card balances are rising, indicating potential pressures from tighter credit and higher interest rates. However, inflation-adjusted balances remain below pre-pandemic levels. Elevated deposit levels support small businesses, and total payment growth per small business client has increased year-over-year, particularly in the services sectors.
While looking at the market, US productivity has rebounded after declines in 2022 and 2023. The potential for artificial intelligence (AI) to drive a productivity boom brings both benefits and pitfalls. Rising productivity reduces inflationary pressures and allows for a soft-landing scenario. The long-term significance of productivity growth is the potential for rising living standards. Whether AI will rival the Industrial Revolution remains, with the potential for significant impact on various sectors. The recent productivity recovery has put the US economy back on track or even above trend.
Bank of America’s data is particularly useful, as are the financial pressures small businesses face due to tighter credit and higher interest rates. However, the fact that inflation-adjusted balances remain below pre-pandemic levels, combined with elevated deposit levels, suggests resilience among small businesses.
Small businesses should proactively manage their finances, explore alternative financing options, and optimize their cash flow to navigate the challenges of higher borrowing costs. The growth in total payment per small business client, especially in the services sectors, points to opportunities for growth, emphasizing the importance of adapting to changing economic conditions and consumer spending patterns.
Businesses, especially those in consumer-facing sectors, should closely monitor monetary policy trends and adjust their strategies accordingly. Offering more flexible payment options or promotional financing could alleviate some consumer pressures. And remember, distribution is there to provide that financing.