Demand for Credit Slows with Sluggish Economic Growth
Connecticut's credit conditions deteriorated slightly in the April-June timeframe according to the Second Quarter 2012 CBIA/Farmington Bank Credit Availability Survey, surrendering first-quarter gains.
"With economic growth waning, demand for credit has slackened as well. This lies in sharp contrast to what we saw earlier in the year when expectations for expansion were more favorable," says CBIA economist Peter Gioia.
"It was hoped that the prospects for rising profits would boost business lending, thereby further reducing the risk of another downturn in the 2012-13 timeframe, but despite record-low interest rates, credit demand remains rather lackluster."
"Economic recovery in the middle part of the year has clearly become more tenuous given the slowdown in real GDP growth, modest job gains, and scaled-back plans for expansion within the manufacturing sector," says John Patrick, president and CEO of Farmington Bank.
"Although the slow economy means reduced demand for credit, the good news is that current credit availability readings are up considerably from one year ago and so the basic uptrend in overall credit conditions remains intact for the time being."
Economists have long argued that credit availability was crucial to sustained economic growth and therefore expected to play a pivotal role in the strength of expansion for the balance of 2012 and into 2013.
"Credit availability is clearly impacted by the overall strength of economic recovery, and with a 1.5% growth rate in the second quarter, it would seem that expansion plans for many firms are being postponed," adds Don Klepper-Smith, chief economist and director of research at DataCorePartners.
"The election is creating some degree of economic uncertainty as well, also suggesting a weakening of near-term credit demand."
The current consensus among economists is that economic recovery is moderating, with domestic job expansion tapering, energy prices siphoning off discretionary consumer spending, and food prices poised to move higher due to drought conditions in many parts of the country.
Going forward, credit availability will be an important step in assisting area businesses with funding for day-to-day operations, payroll obligations, capital investments, maintaining sufficient levels of inventories, and future expansion.
The survey showed only 15% of respondents saw future credit conditions improving over the near term, while 43% thought future credit conditions would remain effectively unchanged. About 41% believed near-term credit conditions were likely to deteriorate in coming months.
· About one in every four respondents (27%) saw credit availability as a problem for their business, and 73% said credit availability was not a problem for their firms.
· Of those who saw credit availability as a problem, 27% reported that lack of credit adversely impacted their ability to maintain an adequate workforce and forced them to reduce their workforce. Sixty-two percent said that they would be unable to grow or expand as a result of inadequate credit, and another 16% indicated employee compensation and/or benefits would likely be reduced as a result.
· When asked what types of financing their firms most needed, about one-third (31%) of those surveyed nominated working capital for day-to-day operations, while another 14% said they needed capital for machinery and equipment purchases.
· About one-third (34%) of respondents said their company utilized financing within the last three months to meet capital needs, while 64% said that they did not seek financing.
The Second Quarter 2012 CBIA/ Farmington Bank Credit Availability Survey was emailed to approximately 1925 Connecticut businesses in July of 2012. A total of 240 executives responded, for a margin of error at 95% confidence at +/- 6.45%.
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