Fed report finds small firms continue recovery from pandemic hit

By Michael S. Derby

NEW YORK (Reuters) - U.S. small businesses continued to mend from the coronavirus pandemic last year even as these firms faced considerable challenges from high inflation and scarce labor, a report released by the Cleveland Federal Reserve on behalf of the 12 regional central banks, said Wednesday.

But even as these small firms saw better times in 2022 relative to the prior couple of years, business conditions were still on balance softer than those that prevailed before the pandemic first struck three years ago, according to the latest Small Business Credit Survey for 2022.

For the first time since the 2020 survey, small firms “were more likely to report that revenues and employment levels increased rather than decreased in the past 12 months, and the share of firms reporting that they were operating profitably rose substantially year-over-year.”

The recovery of firms last year came as high inflation created challenges for many survey respondents. Getting workers in a tight labor market was also an issue faced by many of the firms.

The report said that the central bank survey polled 8,000 firms across the country with 500 employees or fewer. It noted that these small businesses represent 99.7% of the totality of American employers.

Small firms often face challenging business circumstances without the access to credit larger firms can tap to navigate the ups and downs of the economy. The report arrives as the Federal Reserve has dramatically increased the cost of capital as it seeks to lower high levels of inflation, as many worry those increases could push the economy into recession.

The report found that even as small firms were on the mend, they were worried about their respective futures.

“Firms in the most recent survey remain less likely than firms in pre-pandemic surveys to expect revenue or employment growth in the coming year,” the report said. “Financially, around four in five firms cited challenges related to rising costs, and close to half of firms reported difficulties paying operating expenses or navigating uneven cash flows,” the report added.

(Reporting by Michael S. Derby; Editing by Andrea Ricci)