Peter Boockvar

An economic slowdown in response to higher interest rates is not one event, it is a progression of events that take time to play out. The most immediate impact is always on the two biggest sectors directly impacted, like housing and autos but it takes time to metastasize to other parts of the economy. Much depends on how sensitive one is to the rising cost of capital and the extent they have floating vs fixed borrowing needs. In case you didn’t see the article in yesterday’s WSJ titled “Higher Rates Squeeze Small Businesses,” I’m going to highlight and quote parts of it here to reflect my point. 

Broadly speaking, “Forty-six percent of small business owners said higher interest rates are affecting their business, according to a November survey of roughly 600 small businesses for the WSJ by Vistage Worldwide…Another 25% of those surveyed said rising rates hadn’t yet had an effect, but anticipated they would.” 

For V8 Speed and Resto Shop, which restores and upgrades “muscle cars”,  “This fall, with interest rates rising, it began requiring prepayments on orders exceeding $2,000, to reduce financing costs incurred when it pays vendors upfront but doesn’t collect money from customers until the part is installed.”

“David Gill, chief executive of Cold Freight Services, a provider of dry ice and refrigerated courier services in Austell, GA, has seen the interest rate on his company’s business credit card jump to 20.99% from 17.24% in April. “We use credit cards for everything,” including fuel, hotels, supplies and other expenses, said Mr. Gill, who has about 40 employees. “We are kind of hostage to the rate.” 

“Rising interest rates have already hurt sales at Brooklyn SolarWorks, a designer and builder of roof top solar systems. About one-third of residential customers finance their solar systems, which typically cost $30,000 to $70,000. Financing options that let buyers buy down their interest rate to .99% or 1.99% have largely disappeared, said T.R. Ludwig, CEO of the Brooklyn, NY company, which has 73 employees.” 

“At Reverence, a fine-dining restaurant in the Harlem neighborhood of NY, higher interest rates have pushed monthly debt service costs $2,000 higher, bringing them to $5,000. ‘For a business like mine, that $2,000 is my paycheck,’ said chef Russell Jackson, who owns the 3 yr old restaurant with is wife Lora.” 

Lastly, “Christopher Kline said he has reduced hours by 25% for most employees at Eric & Christopher, a Perkasie, PA maker of silk-screened pillows and totes, after large retailers with too much inventory cut back on new purchases…The owner is delaying investments that could open up new markets. Borrowing to finance those expenditures has become too costly, he said, now that the rate on the company’s line of credit has increased to 6.5% from 3.75% in March.” 

As many debate soft landing vs hard landing, bear market vs bull market, I’m becoming most worried about a death by a thousand cuts economy and stock market. 

I mentioned yesterday the weakness in South Korean exports in the first 20 days of November and also out was Taiwan’s October exports which fell by 6.3% y/o/y, more than the estimate of down 1.9%. It’s the 3rd month in the past 4 that has seen a y/o/y decline. Exports to China and Hong Kong fell by 27% y/o/y while rising by 1.2% to the US. The weakness was led by plastics, textiles, machinery and metals.