Published: Wednesday, 11 Nov 2009 | 3:21 PM ET

Text Size

For all the talk of U.S. banks not lending, the bigger problem may be that credit-worthy companies simply do not want to borrow.

This presents a quandary for President Barack Obama, who is scrambling to find ways to spur growth and hiring with the jobless rate at 10.2 percent and likely to keep rising well into 2010, even as the economy climbs out of a recession.

So far, much of the effort in Washington has focused on loosening credit conditions to make borrowing easier. But if companies don't want to take on more debt right now, that strategy can't be very successful.

"The demand for credit is in short supply; there is not a major shortage of credit supply," said William Dunkelberg, chief economist at the National Federation of Independent Business, which represents small companies. "What small business needs is customers."

Dunkelberg's group released a monthly survey of small businesses Tuesday that found few companies planned to increase capital spending or hiring, and only 4 percent listed getting financing as their biggest problem. In the early 1980s, the last time the jobless rate was this high, some 37 percent of those polled listed financing as their top concern.

The Federal Reserve's quarterly survey of senior loan officers, released Monday, showed larger companies were also reluctant to borrow. Demand for credit weakened since the Fed's July report, albeit at a slower pace.

Even among companies that are tapping credit markets, there is evidence the money is going to shore up balance sheets rather than to pay for hiring, investment or expansion.

Oleg Melentyev, a debt analyst with BofA Merrill Lynch Global Research, said so far this year, high-yield debt issuers had used 75 percent of the proceeds to refinance existing debt, the highest proportion in at least 13 years.

"As the saying goes, you can lead a horse to water, but you can't make it drink," he wrote in a note to clients.

"Our data shows that the fact that credit-worthy borrowers can once again tap the debt market on reasonable terms doesn't mean that many of them are eager to do so for any reason other than refinancing their existing debt."

Second Stimulus?

In the aftermath of a financial crisis fueled by over-borrowing, it is understandable that businesses are keen to reduce debt. But that doesn't do much to kickstart the economy and generate the level of private-sector growth needed to bring down the unemployment rate.

Obama has tried to encourage lending to small businesses as a way to create jobs, directing about $15 billion of the $700 billion bank bailout fund to support small-business lending.

NFIB's Dunkelberg called that a "nice gesture" but said it would probably fall flat because business owners have no reason to borrow as long as sales are weak and confidence low.

"Record low percentages cite the current period as a good time to expand, more owners plan to reduce inventories than to add to them, and record low percentages plan any capital expenditures," he said.

Obama hinted at new policy steps Friday when he said his administration was considering increased spending on roads and bridges, business tax cuts, refitting buildings to make them more energy efficient, easing the flow of credit to small businesses and boosting U.S. exports.

But those efforts, aimed largely at creating jobs, may still fall short if most consumers remain wary about spending.

What if the problem is that there is just too much stuff — houses, furniture, clothing, televisions, whatever — and not enough people willing or able to buy? That is the diagnosis of Wells Fargo Chief Economist John Silvia, and he is concerned that public policy is making matters worse.

"We see an economy characterized by an excess supply of goods, an excess supply of labor and an excess supply of credit," he said.

For the economy to grow fast enough to generate jobs, those excesses will need to be brought back into balance.

In theory, that would suggest prices need to fall even further to stimulate demand. In the real world, that still points to a painfully slow recovery and little that the White House can do to speed it up.

• Slideshow: Where the Jobs Are

Print

Email

Text Size