People sometimes forget that three factors influence the various aspects of our economic lives. It's one thing to say, for example, that demand for a product or service is weak, but what about the other two determinants? Is the price higher than what people are willing or able to pay? Is the supply too large relative to what the market can readily absorb? Assuming that only one of these aspects explains things can create a misleading picture. As the following Bloomberg report, "Lending to Small Businesses Fell in Third Quarter, Fed Says," suggests, tight credit conditions aren't the only reason why small business borrowing has been soft.
Lending to U.S. small businesses fell in the third quarter, showing the companies that account for more than half of total job creation are still struggling to emerge from the recession.
Net borrowing by non-financial non-corporate businesses shrank by $162.7 billion at an annual rate from July through September, the seventh consecutive quarterly decrease, according to the Federal Reserve’s Flow of Funds report released today in Washington. Still, it was the smallest drop of the contraction in lending that began in the first three months of 2009.
Small companies are “still hurting and working toward healing and not borrowing,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who worked on the report as a Fed economist. “They’re paying down bank loans, they’re paying down mortgages.”
And why might they be doing that?
“There’s not a strong desire to borrow aggressively because activity is still relatively modest,” she said.