LOS ANGELES--(BUSINESS WIRE)--Despite a generally optimistic economic outlook, businesses reported that the recent increase in the federal interest rate is affecting profitability and restricting hiring, according to new results from the first quarter 2017 Private Capital Access (PCA) Index report from Dun & Bradstreet and Pepperdine Graziadio School of Business and Management. The report can be found here.
Mid-sized businesses (between $5-100 million revenue) reported both a decline in profitability and an inability to hire new employees due to the higher interest rate environment. Profitability was down six points for the first quarter at 68 percent compared to 74 percent from the previous quarter. Twenty-seven percent of these businesses, up from 20 percent in the previous quarter, cited the current financing environment has restricted their ability to hire new employees.
Fewer mid-sized businesses reported that “they were able to qualify” for credit in Q1 2017 (55 percent) than in Q4 2016 (62 percent). In December 2016, the Federal Reserve raised interest rates by 0.25 percent—the second increase of the decade. On March 15, 2017 the Federal Reserve initiated another short-term rate hike of 0.25 percent, and signaled two more increases this year amid strong job growth and rising inflation. Such interest rate hikes can impact the ability of businesses to borrow capital to maintain facilities, hire employees, and expand operations. The impact of the March interest rate hike will be measured in the Q2 report.
“The Federal Reserve’s assessment of improving economic conditions is consistent with many of the PCA’s findings from the past year, but we are also seeing nervousness on the part of business owners due in part to rising interest rates,” said Craig R. Everett, PhD, director, Pepperdine Private Capital Markets Project. “While low interest rates in recent years have helped businesses stabilize, this quarter’s results suggest that the current rate hikes may negatively impact cash flow and therefore soften their ability to hire throughout 2017.”
Some Relief for Small Businesses
According to survey results, the decrease in profitability and hiring associated with the December interest rate hike among mid-sized businesses contrasts with the general economic progress experienced by small businesses (annual revenues under $5 million).
Fewer small businesses operated at a loss in Q1 2017 compared to a year ago. Fifty-three percent of those businesses reported that they were profitable, compared to 50 percent in Q1 2016, while 22 percent reported a loss, compared to 26 percent in Q1 2016.
However, in Q1 2017, more small businesses reported “working capital fluctuations” as their primary reason for seeking financing in the next six months (22 percent), compared to Q1 2016 (19 percent). Fewer reported seeking financing for growth and expansion (56 percent) than in Q1 2016 (63 percent).
“Optimism continues to rise for small businesses, and that has been fueled by increasing revenues and profitability in an expanding economy," said Jeff Stibel, vice chairman of Dun & Bradstreet. “But we can expect stability to be the biggest component of optimism for businesses of all sizes in the next year.”
The PCA Index is a quarterly indicator produced by the Graziadio School of Business and Management at Pepperdine University with the support of Dun & Bradstreet. The Q1 2017 Index report was derived from 1,317 completed responses collected from February 3 – February 17, 2017.
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About Pepperdine Graziadio School of Business and Management
A leader in cultivating entrepreneurship and digital innovation, the Pepperdine Graziadio School of Business and Management focuses on the real-world application of MBA-level business concepts. The Graziadio School provides student-focused, globally-oriented education through part-time, full-time, and executive MBA programs at our five Southern California locations, Silicon Valley and Santa Barbara campuses, as well as through online and hybrid formats. In addition, the Graziadio School offers a variety of master of science programs, a bachelor of science in management degree-completion program, and the Presidents and Key Executives MBA, as well as executive education certificate programs. Follow the Graziadio School on Facebook, Twitter at @GraziadioSchool, and LinkedIn.