The DC Policy Center’s Rivlin Initiative on Economic Policy and Competitiveness launched the Quarterly Business Sentiment Survey (QBSS) in January 2024. The goal of the survey is to offer comprehensive insights into experiences from the business world to elected officials, the media and the community at large. Conducted four times a year, the survey covers companies’ recent experiences, economic expectations and selected topics, such as access to capital.
Most r’s in the fourth roundrespondents were owners or managers of established small businesses. Just over half of respondents were affiliated with companies that had been in business for more than a decade, and more than four in five respondents represented companies with 20 or fewer employees. Respondents’ affiliated businesses represented a wide range of industries, including the professional, scientific and technical services sector (23%), the real estate sector (11%), and the food service sector (10%).(1)
Finding #1: Optimism about the district economy emerges for the first time
A plurality of respondents expected little to no change in the direction of developing countries’ economies over the next six months. More particularly, for the first time since investigation began, more respondents were optimistic than pessimistic about Washington, DC’s economy over the next six months. This optimism is consistent with recent employment data: between September and November 2024, non-agricultural employment increased by 1.4 percent (10,800 jobs).
Despite relative optimism, a strong majority of respondents reported little or no change in operating revenue or the number of employees at their affiliated businesses over the past three months. Additionally, more respondents reported a decline in revenue and number of employees than those reporting an increase.
Finding #2 Respondents expect minimal changes in access to capital
56 percent of respondents expected little to no change in their affiliated business’ ability to access capital over the next six months. Among those who anticipate a change, more respondents expect easier access rather than greater difficulty.
These sentiments are consistent with recent statements and actions by the Federal Reserve. Although the Fed does not directly set interest rates on business loans, its decisions have considerable influence. The public consensus is that the Federal Reserve will gradually cut the federal funds rate as long as inflation continues to fall until it reaches the Fed’s 2% inflation target. However, if inflation falls more slowly than expected, rate cuts could be delayed. In the third quarter of 2024, the Fed’s preferred measure of inflation, the Personal consumption expenditure (PCE) Price Index – stood at 2.2%, reflecting a decline of just under 4 percentage points since the first quarter of 2022.
Finding #3: Lines of credit and debt financing were the most commonly used forms of external financing
Among respondents who answered questions about access to capital, about half said their affiliated businesses had sought outside financing in the past year.
These respondents sought different types of financing. The most popular sources included lines of credit (53%), debt financing (32%), and equity (28%). Only 7% of respondents opted for equity financing, making it the least common method.
Finding #4: 66% of surveyed companies that sought external financing reported limited success.
All surveyed companies that sought external financing in the past year (excluding equity) were unsuccessful in obtaining it. 41 percent of respondents said their affiliated business received little or none of the funding they sought, while 25 percent received partial funding. In total, 66 percent of respondents had limited success in obtaining external funding, while 34 percent obtained all or most of the funding they sought.
Finding #5: High interest rates were the most common barrier to obtaining external financing for surveyed businesses.
Companies that had difficulty obtaining external financing reported a variety of difficulties. Respondents cited high interest rates, cumbersome application processes, and collateral requirements as the top three obstacles. Given the high inflation rates of recent years, it is not surprising that high interest rates have been a major headwind. For context, the 10-year Treasury yield rose from an average of 2.95% in 2022 to 4.21% in 2024, reflecting rising borrowing costs.
Political implications
First, the district can foster a better business environment by ensuring regulations are cost-effective and up-to-date. In times of high borrowing costs, such a modern regulatory regime can help minimize unproductive costs for businesses.
Second, the results suggest that national policies can affect local conditions and that some economic forces are beyond district control, such as higher inflation and interest rates. In particular, respondents cited high interest rates as the main challenge in obtaining external financing. This result highlights the importance of keeping inflation low and stable and preserving the independence of the Federal Reserve.(2)
Annex to the survey
- Survey responses were weighted based on the industry composition of DC region companies. These weights were created using data from the Quarterly Census of Employment and Wages for the first quarter of 2024. The raw sample size for the survey was 220. The weighted sample size was 217. Where shown, graphs indicate the weighted sample size.
- The DC Policy Center recruited survey participants through email, word of mouth, social media, and the center’s website. As in previous towersmany respondents came from a list of 41,000 businesses registered in the District of Columbia. However, not everyone asked to complete the survey responded. This non-response bias makes the reported feelings less representative. It is difficult to determine whether those who did not respond to the survey would have had the same feelings as those who did.
(1) This paragraph and the two paragraphs that follow are borrowed and adapted from chart of the week preview the results.
(2) Some previous economic factors research showed that central bank impedance is associated with a lower and more stable, or less variable, inflation rate.