The ripple effect of the financial turmoil on Wall Street is spreading more deeply into the American economy.
The local hardware store is finding it more difficult to get the loan it needs to buy its summer gardening merchandise. Ivy-covered colleges and universities are finding that donors have second thoughts about contributions until the stock market quiets down. Some small businesses that count on using credit cards to finance their business are getting letters informing them of reductions in their credit lines or increases in their rates.
One sign of the blues on Main Street: consumer-confidence surveys. On Tuesday, the Conference Board said that consumer confidence had dropped to a level not seen since the recessions of 1980 and 1973.
"The plunge is directly related to the turmoil in the financial system," says Mr. Zandi.
Economists are particularly concerned about one development: CIT Group, a commercial finance company that lends to small business, used a $7.3 billion line of credit from banks because it was having trouble selling its debt.
CIT, for its part, says it is looking to sell some nonstrategic assets or business lines and is looking for additional capital. "We recognize that given the current market environment, we need to operate a smaller, more focused company," writes Mary Flynn, a spokeswoman, in an e-mail.
Limited credit availability
Strains on CIT could pose just one more challenge for small to medium-size businesses, which are finding it increasingly tough to get loans. "Bank lending to small business is freezing in place," says George Cloutier, a small-business expert and chairman of American Management Services, a consulting group. "Availability of credit to small and mid-sized companies has almost dried up."
The decline in housing prices isn't helping either, in that many small-business people use their homes as collateral for loans, says Michael Leonard, executive director of the greater Richmond Small Business Development Center in Virginia. "What we're finding is that clients already somewhat highly leveraged are finding it difficult to get new money."
Small-business owners are also increasingly running into late-paying clients, he says. "They need to borrow money to bridge that gap as well," he says.
Business surveys seem to be mixed on the issue of the availability of credit. Last month, a survey conducted for the National Federation of Independent Business found no problem getting credit, says Bill Dunkelberg, chief economist for the organization. "We've been doing the surveys for 35 years, and when things get tough, our members let us know," he says.
But a survey done in 2007 for the National Small Business Association (NSBA) found that just 67 percent of respondents said they could obtain adequate financing, compared with 76 percent in 2000. The largest source of financing for the small-business members: their credit cards.
That's the case for Marilyn Landis, chairman of NSBA and owner of Basic Business Concepts Inc. in Pittsburgh. Ms. Landis is expanding her business, which provides temporary chief financial officers for companies not large enough for a full-time CFO. She applied twice for a line of credit and instead was sent a credit card.
Recently, Landis has been traveling weekly to New England as part of the expansion of her business, so she has run up her credit-card balances. "Much larger monthly balances – even though I pay off the card every month – triggered a change in my credit score," says Landis, a former banker. "One card company cut my credit line in half. Another card company raised my finance charge from 3.99 percent to 23.99 percent."
Impact on universities
Educational institutions have also been encountering challenges. Last week at a dinner in New York, many of the presidents or chancellors of eight universities said that the turmoil in the credit markets was affecting their institutions. G.P. "Bud" Peterson, chancellor of the University of Colorado, Boulder, said he was expecting a significant contribution from an alumnus. But out of the blue, his potential donor said he wanted to wait until the financial markets settled down.
Rebecca Chopp, president of Colgate University in Hamilton, N.Y., said her graduates sometimes have landed jobs at Bear Stearns, an investment bank that will disappear after an emergency merger with JPMorgan Chase.
Lois DeFleur, president of the State University of New York at Binghamton, recounted how more students are coming in for financial aid because their parents' financial situations have changed.
The credit-market turmoil also means some states and other municipal borrowers are paying more interest on some debt. For example, the state of Wisconsin is in the process of restructuring $945 million in short-term borrowings. In the past, the debt carried interest rates in the 5 to 6 percent range. But last month, it spiked up to 10 to 11 percent. To remedy that, on April 1, the state will issue longer-term debt for most of the prior short-term borrowings.
It's still too early to know if it will cost the taxpayers of Wisconsin more money to borrow. But in any event, other costs exist. "At the moment, there are some additional transaction costs and enhancement costs we had not planned on doing," says Frank Hoadley, state director of finance.