Businesses hope for new fiscal stimulus
URL:http://www.usatoday.com/money/economy/2002-11-07-bizecon_x.htm
By Barbara Hagenbaugh, USA TODAY
WASHINGTON — A surprising Republican victory in the Senate and an unexpectedly large rate cut by the Federal Reserve this week may do more to boost beleaguered U.S. businesses than consumers.
Business owners and economists believe a Republican majority in both chambers on Capitol Hill paves the way for passage of new corporate tax incentives as well as other "business-friendly" policies.
The Federal Reserve's decision to reduce interest rates by a half-percentage point will aid businesses by reducing borrowing costs across the economy, including on current and new loans held by companies.
"The climate is far more conducive right across the board for business" after this week, says Greg Valliere of Schwab Washington Research Group.
But underscoring continued uncertainty, investors sent stocks lower Friday to end the week mixed. The Dow Jones industrials posted their fifth straight week of gains, while the Nasdaq composite and S&P 500 snapped their four-week winning streak. For the week, the Dow rose 0.2%, the Nasdaq fell 0.1% and the S&P 500 dropped 0.7%.
Construction company owner Patrick McLain of St. Louis is happy not only because the interest rate on his business loan has fallen, but "The confidence level of our customers is going to be higher now because the threat of making money that will be turned into taxes is lessening."
Some economists question if consumers will benefit all that much from the Fed move because rates were already at four-decade lows and consumer borrowing costs are not expected to drop much further. But many say this week's developments will help businesses in a variety of ways:
Many businesses, mostly small and midsize, depend onlines of credit from banks to maintain cash flow, pay workers and finance inventories. The interest rates on the loans are tied to the prime rate, which is influenced by the Fed's target for short-term interest rates. After the Fed cut rates Wednesday, the prime rate at banks fell to 4.25%, the lowest since 1956. That reduces monthly loan payments for companies.
"Right now, there are a lot of hard-pressed businesses that rely on those bank lines so when rates go down it helps immediately," says Mark Zandi, chief economist at Economy.com.
Banks have been tightening lending standards throughout the year and some small businesses have been having problems getting loans, says Jerry Jasinowski, president of the National Association of Manufacturers. He hopes the Fed's move will "stabilize credit markets so that we can get the banks and others to be a little bit more liberal about making loans."
With Republicans soon to control Congress, businesses are hopeful more fiscal stimulus focused on efforts to spur corporate investment and spending will be enacted. President Bush Thursday advocated making the $1.35 trillion tax package passed last year permanent.
Some business groups became nervous as corporate scandals multiplied earlier this year that government would tighten the regulatory noose on Corporate America. But those worries softened this week. "Any fear in the markets that Washington was going to go anti-business has evaporated," Schwab's Valliere says. |
