PayNet: Fed Tapering Positive for Small Business Economy
According to a recent PayNet study, rising interest rates mean more investment by small businesses, not less. The rise in interest rates has a minor impact on the financial risk of small businesses, so failure rates will rise only slightly, PayNet said.
Based on its study on the effect of interest rates on small business investment include, PayNet said:
• We see that higher interest rates usually coincide with more business investment.
• We studied small business investment starting in 2005.
• We compared the Small Business Lending Index against the 1 month U.S. Treasury Rate.
• We found that rising rates means more investment by small businesses.
• When small businesses are investing more, the economy is growing.
2005 – 2007 shows a high correlation between rising rates and rising investment by small business.
• Then treasury rates rose from 2% to about 5% in 2007
• The Small Business Lending Index rose too from 100 to 133.
• Interest rates more than doubled and small business investment rose 33%.
By 2009 interest rates fell below 1%.
• The Small Business Lending Index fell to by 50%.
• Correlation between interest rates and the Index was extraordinary high at .79.
• This means that as go interest rates so goes small business investment.
This correlation is not perfect as we saw in 1981 when Fed Raised rates to beat inflation.
• Recovery Period is thought to be 2010-2011 the Fed kept rates unusually low.
• Small business investment rose back to the same level as 2005.
• So the low interest rates helped small business invest more.
• So the Feds efforts to keep rates low have helped small businesses recover.
Recently in 2013 investment by small businesses has been relatively dormant until just recently.
• We see the Index stalled at around 100 for most of 2012-2013.
• Only in the last few months we’ve seen the Index jump.
• And business defaults are at all-time lows.
According to PayNet president William Phelan, “Tapering presents a lot of anxiety for people because it is change.
• When FRB mentions tapering the markets go into a conniption fit.
• It might hurt Wall Street but it is a positive for the small business economy
• Moderate rising rates signal a growing economy for Main Street.