PETER M. GIOIA – Current growth ‘slow’

The ready availability of credit in the fourth quarter of 2005 left business executives with increased confidence, but that confidence likely will not last long as businesspeople are admitting concern that interest rate hikes could slow the economy in the future.

“Right now there’s certainly a fairly robust amount of confidence,” said Peter M. Gioia, chief economist for the Connecticut Business & Industry Association, which recently released surveys on the economy and the availability of credit.

“Basically, this is good news,” Gioia noted.

The credit situation has improved dramatically since the hurricanes that pummeled Florida and the Gulf Coast last year, and the results of the related CBIA survey reflect that, he added.

The lending situation in Connecticut improved during the third quarter of last year, and 88 percent of respondents to the survey rated credit availability in the state as either good or average, up from 80 percent a year ago. Ten percent said the conditions were fair or poor, down from 14 percent a year ago.

“Business confidence in the credit climate has improved since the last survey, taken in the midst of hurricanes Katrina and Rita,” Gioia said in a prepared statement. “Business executives are borrowing money and see potential improvements in the economy in the next few months, including a possible end to short-term interest rate hikes.”

But there is the potential of more interest rate hikes by the Federal Reserve, which would likely put a damper on that confidence, Gioia said. More than half of the executives who responded to the CBIA’s fourth-quarter 2005 economic survey said a rate hike of a full point in 2006 would hurt sales at their firms, while 38 percent said they would not feel an impact. Forty-six percent of the business executives who responded said raising interest rates a full point might adversely affect their plans to hire more workers, while more than half said it would not have an impact on hiring.

“It’s evident that businesses are beginning to see slow but improving economic growth in both Connecticut and the [United States],” Gioia said in a prepared statement. “But they are concerned about what direction the Federal Reserve will take this year and how its actions could potentially and quickly turn slow growth into stagnation.”

‘Ample Credit’

If interest rates rise, business could see the effects by the middle of this year.

“If the Federal Reserve continues to raise interest rates, businesses could see higher costs and less credit available to run their companies in the next three to six months,” said Donald Klepper-Smith, chief economist and director of research for DataCore Partners, in a prepared statement.

But for now, businesses are happy with the availability of credit, and Gioia said the first half of 2006 will mirror the moderate growth of the last half of 2005. CBIA’s survey, which was done with TD Banknorth, showed increases in the total credit availability index, the future expectations index and the current credit availability index from the beginning to the end of 2005.

“The rise in all three indexes in this survey indicates that businesses see ample credit over the near term as they seek further financial resources to grow in 2006,” said TD Banknorth President and Chief Executive Officer John Patrick in a prepared statement. “This optimism could also be seen as an endorsement and support for Ben Bernanke, who replaces Federal Reserve Chairman Alan Greenspan at the end of January.”

The CBIA/TD Banknorth total credit availability index reached 83, the highest reading since the survey began two years ago.

The survey showed that businesspeople were more buoyant about the national economy, the state economy and their own firms’ performance during the last quarter of 2005. Thirty-three percent of survey respondents said the U.S. economy improved during the quarter, up from 13 percent in the third quarter of last year. Nineteen percent of respondents said they expect the economy to worsen, down from 45 percent in the third quarter.

Fourteen percent of businesses reported improvements in the state’s economy. Nine percent reported the same in the last survey. Twenty-four percent of respondents said that conditions in Connecticut were deteriorating, compared with 38 percent in the third quarter.

The current credit availability index, which indicates the health of the state’s credit markets and measures the quality of credit conditions across the state, rose 18 percent in the survey, climbing from 55 in last quarter’s survey to 65, the best overall reading since the third quarter of 2004. A reading above 50 indicates improvement in credit conditions, while a reading below 50 indicates deterioration. The index is a composite measurement of total credit conditions (80) and future expectations (30), which together reflect a positive environment and slightly more optimism than the last survey.