The annual inflation rate continued to decline with May coming in at 4% which was the eleventh consecutive monthly decrease and the lowest level since March 2021. Lower inflation is driven primarily by lower energy costs which decreased 11.7% year over year. Core inflation, which excludes volatile energy and food, slowed to 5.3%.
Despite inflation still much higher than the Fed’s 2% target, the Fed paused interest rate hikes after 10 consecutive rate increases in the last 15 months. The Fed indicated that additional hikes may come later this year.
New businesses continue to open at a high rate. Despite that these newer, and specifically smaller, businesses are making up a larger and larger portion of commercial credit, they have additional funding needs.
According to the Federal Reserve’s 2023 Small Business Credit Survey, almost 70% of businesses with zero employees use personal funding sources for their business while only 27% of them obtain funding from financial institutions or lenders. Since the non-employer businesses reported on 36% had a decline in revenue in 2022 (vs. 38% of employer businesses’ revenue declined in 2022), there is a huge opportunity for financial institutions to tap into this market and support small business growth.
What I am watching
Small businesses with very few or no employees flourished coming out of the pandemic. It will be interesting to see how many of these micro-businesses will survive the headwinds of inflation, higher interest rates and less access to credit.
With an economic slowdown on the horizon, the Fed actions in the coming months will be critical to the outcome. It is yet to be determined if the U.S. economy will achieve the hoped-for soft landing rather than a recession.
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