The Struggle of Small Businesses in 2024: High Interest Rates and Low Consumer Spending
July 14, 2024
Small and mid-sized businesses are facing significant challenges, with many unable to survive the current economic climate. In the first half of 2024 alone, 346 companies filed for bankruptcy, marking the highest number since 2010. In June, 75 companies filed for bankruptcy, the highest monthly total since early 2020. A significant portion of these bankruptcies comes from the "consumer discretionary" sector, which includes businesses like restaurants, clothing stores, and car dealerships—primarily small to mid-sized enterprises.
The soaring interest rates, the highest in nearly 25 years, are a substantial burden. Businesses that depend heavily on borrowing for equipment, inventory, payroll, and expansion are particularly strained. Small businesses, in particular, face difficulties accessing credit, with a recent Federal Reserve Bank of Kansas City survey indicating a consistent tightening of credit standards for ten consecutive quarters. This is a severe issue for private businesses that cannot raise funds through financial markets.
Consumer demand has been disappointing this summer, as noted in the latest survey by the Institute for Supply Management. Unlike the previous year, U.S. consumers are now spending more cautiously, impacting service-providing businesses that rely heavily on summer revenue. The recent bankruptcies of an arcade and a hotel management company highlight the combined effects of weak consumer spending and lingering supply-chain issues. However, some analysts believe this surge in bankruptcies might be more about the economy normalizing post-pandemic than a sign of impending economic trouble.
The pandemic introduced various support programs that kept many small businesses afloat, resulting in fewer bankruptcies in 2021 and 2022. Now, as these programs have ended, the natural churn in the business landscape is becoming more apparent. Despite rising bankruptcies, new business applications have remained elevated since 2020, indicating ongoing entrepreneurial activity even as some businesses close their doors.
The Federal Reserve has maintained high interest rates to combat inflation, which has shown signs of resuming its downward trend. This development could allow the Fed to start lowering borrowing costs later this year. Even a single rate cut could provide significant psychological and financial relief to businesses and consumers by signaling a shift in economic policy direction.
Meanwhile, banks are considering ending free checking accounts due to rising regulatory costs. Chase Bank's potential move to discontinue such services has sparked concerns. The traditional consumer banking model, which relies on recouping costs through various fees, might be changing. This shift could have broader implications for how consumers interact with their banks, emphasizing the need for vigilance and adaptation in the financial sector.
The soaring interest rates, the highest in nearly 25 years, are a substantial burden. Businesses that depend heavily on borrowing for equipment, inventory, payroll, and expansion are particularly strained. Small businesses, in particular, face difficulties accessing credit, with a recent Federal Reserve Bank of Kansas City survey indicating a consistent tightening of credit standards for ten consecutive quarters. This is a severe issue for private businesses that cannot raise funds through financial markets.
Consumer demand has been disappointing this summer, as noted in the latest survey by the Institute for Supply Management. Unlike the previous year, U.S. consumers are now spending more cautiously, impacting service-providing businesses that rely heavily on summer revenue. The recent bankruptcies of an arcade and a hotel management company highlight the combined effects of weak consumer spending and lingering supply-chain issues. However, some analysts believe this surge in bankruptcies might be more about the economy normalizing post-pandemic than a sign of impending economic trouble.
The pandemic introduced various support programs that kept many small businesses afloat, resulting in fewer bankruptcies in 2021 and 2022. Now, as these programs have ended, the natural churn in the business landscape is becoming more apparent. Despite rising bankruptcies, new business applications have remained elevated since 2020, indicating ongoing entrepreneurial activity even as some businesses close their doors.
The Federal Reserve has maintained high interest rates to combat inflation, which has shown signs of resuming its downward trend. This development could allow the Fed to start lowering borrowing costs later this year. Even a single rate cut could provide significant psychological and financial relief to businesses and consumers by signaling a shift in economic policy direction.
Meanwhile, banks are considering ending free checking accounts due to rising regulatory costs. Chase Bank's potential move to discontinue such services has sparked concerns. The traditional consumer banking model, which relies on recouping costs through various fees, might be changing. This shift could have broader implications for how consumers interact with their banks, emphasizing the need for vigilance and adaptation in the financial sector.