The D.C. Policy Center’s Rivlin Initiative on Economic Policy & Competitiveness launched the Quarterly Business Sentiments Survey (QBSS) in January 2024. The survey’s objective is to offer comprehensive information on the business community’s experiences to elected officials, the media, and the broader community. Conducted four times per year, the survey covers businesses’ recent experiences, economic expectations, and selected topics, such as access to capital.
Most fourth-round respondents were owners or executives of established, small businesses. Slightly more than half of respondents were affiliated with businesses that have been operating for over a decade, and more than four in five respondents represented businesses with 20 employees or fewer. The affiliated businesses of respondents represented a diverse array of industries including the professional, scientific, and technical services sector (23 percent), the real estate sector (11 percent), and the restaurant sector (10 percent).[1]
Finding # 1: Optimism about the District’s economy emerges for the first time
A plurality of respondents expected minimal to no change in the direction of the D.C. economy over the next six months. More notably, for the first time since the survey began, more respondents were optimistic than pessimistic about the D.C. economy over the next six months. This optimism aligns with recent job data: between September and November 2024, the District’s nonfarm employment grew by 1.4 percent (10,800 jobs).
Despite the relative optimism, a strong majority of survey respondents reported little to no change in the operating revenue or employee numbers of their affiliated businesses in the past three months. Moreover, more respondents reported declines in both revenue and employee numbers than those reporting increases.
Finding # 2 Respondents expect minimal changes in access to capital
56 percent of respondents expected minimal to no change in their affiliated business’s ability to access capital over the next six months. Among those anticipating a shift, more respondents expected easier access rather than greater difficulty.
These sentiments align with recent statements and actions by the Federal Reserve. While the Fed does not directly set the interest rates on business loans, its decisions have a substantial influence. The public consensus is that the Federal Reserve will gradually cut the federal funds rate so long as inflation continues to decline to the Fed’s inflation target of 2 percent. However, if inflation decreases slower than expected, the rate cuts may be delayed. In the third quarter of 2024, the Fed’s preferred measure of inflation—the Personal Consumption Expenditures (PCE) Price Index—stood at 2.2 percent, which reflects a decline of a little under 4 percentage points since the first quarter of 2022.
Finding # 3: Lines of credit and debt financing were the most common forms of outside funding pursued
Among respondents who answered questions about accessing capital, approximately half reported that their affiliated businesses sought outside funding in the past year.
These respondents pursued various types of funding. Popular sources included lines of credit (53%), debt financing (32%), and owners’ equity (28%). Only 7 percent of respondents pursued equity financing—making it the least common method.
Finding # 4: 66 percent of surveyed businesses that sought external funding reported limited success.
Not all surveyed businesses that pursued external funding in the past year—excluding owners’ equity—were successful in securing it. 41 percent of respondents reported that their affiliated business secured little or none of the funding sought, while 25 percent received partial funding. In total, 66 percent of respondents had limited success in securing outside funding, while 34 percent secured all or most of the funding sought.
Finding # 5: High interest rates were the most common obstacle to securing outside funding for surveyed businesses
Businesses that struggled to secure outside funding reported various challenges. Respondents cited high interest rates, burdensome application processes, and collateral requirements as the top three obstacles. Given the elevated inflation rates in recent years, it is unsurprising that high interest rates were a major hurdle. For context, the 10-year Treasury yield rose from an average of 2.95% in 2022 to 4.21% by 2024—a reflection of the increased borrowing costs.
Policy implications
First, the District can foster a better business environment by ensuring regulations are cost-effective and up to date. During periods of high borrowing costs, such a modern regulatory regime can help minimize unproductive business costs.
Second, the results suggest that national policies can affect local conditions and that some economic forces are beyond the District’s control—such as higher inflation and interest rates. Notably, respondents cited high interest rates as the top challenge in securing outside funding. This result underscores the importance of maintaining low and stable inflation and upholding the independence of the Federal Reserve.[2]
Survey appendix
- Survey responses were weighted by the industry composition of businesses in the D.C. region. These weights were created using the Quarterly Census of Employment and Wages data for the first quarter of 2024. The raw sample size for the survey was 220. The weighted sample size was 217. When noted, graphs report the weighted sample size.
- The D.C. Policy Center recruited survey participants through email, word of mouth, social media, and the center’s website. As in previous rounds, many respondents came from a list of the 41,000 registered businesses in the District of Columbia. However, not everyone invited to complete the survey did so. This non-response bias makes the sentiments reported less representative. It is difficult to determine whether those who did not take the survey would have had similar sentiments to those who did.
[1] This paragraph and the two paragraphs that follow are indebted to and adapted from the chart of the week previewing the results.
[2] Some previous economic research has shown that central bank impendence is associated with a lower and more stable, or less variable, inflation rate.