SMALL
BUSINESS PLAYBOOK
Main Street is convinced that a recession will
hit the U.S. economy this year
PUBLISHED
THU, MAY 5 20229:14 AM EDTUPDATED THU, MAY 5 20228:56 PM EDT
Eric
Rosenbaum
https://www.cnbc.com/2022/05/05/main-street-is-more-sure-than-wall-street-a-recession-is-coming.html
On Wall
Street, more than half of investment and economic professionals think the Fed’s
attempt to combat inflation by raising interest rates and running off the
balance sheet will eventually cause a recession.
Fed chair
Jerome Powell indicated on Wednesday his belief that a “soft” or “soft-ish”
landing can be achieved without the most hawkish central bank policy decisions.
But on Main
Street, eight in 10 small business owners are convinced the U.S. economy will
enter a recession this year, according to the latest CNBC|SurveyMonkey Small
Business Survey.
Main Street
and Wall Street are often at a distance when it comes to the state of the
economy. The likelihood of a recession hitting in 2022 is the latest example.
Both camps are bearish, but small business owners are leading the way in
negative sentiment — by a notable margin.
Wall Street
has been consumed with the Federal Reserve’s efforts to combat the inflation it
pegged wrong for too long, and the risk that interest rate hikes will lead to a
recession. A survey earlier this week from CNBC found that more than half of
economists and investment professionals expect the Fed to fail in its mission
to engineer a “soft landing” for the economy. The stock market breathed a sigh
of relief on Wednesday, with stocks surging after Fed chair Jerome Powell said
that a more aggressive rate hike of 75 basis points is not being considered,
and that the central bank remains convinced it can bring inflation down without
crashing the economy.
The market
was giving back those brief gains on Thursday, and on Main Street, the central
bank messaging was never likely to cause any short-term relief. Eight in ten
small business owners expect a recession to occur this year, according to the
latest CNBC|SurveyMonkey Small Business Survey for Q2 2022. Inflation remains
the top concern for small business owners polled by CNBC and their business
outlook is negative. The survey finds few small business owners seeing any
bright spots in the current economy: just 6% rate the current state as
excellent and 18% as good, while 31% rate it as fair and 44% rate it as poor.
While the
survey’s small business confidence index ticked up for the first time in the
Biden administration due to responses on core index questions related to
immigration policy and a 3 percentage point increase (to 36%) among small
business owners who described their current business conditions as good, it
remains near its all-time lows and well below its pre-pandemic baseline.
“There just
isn’t a lot of optimism on Main Street these days,” said Laura Wronski, senior
manager of research science at Momentive, which conducts the survey for CNBC.
The survey
was conducted by Momentive between April 18-25 among a national sample of 2,027
self-identified small business owners.
In a
parallel survey of the general public conducted for CNBC, a nearly-identical
77% expect a recession to occur this year, again with Republicans more apt than
Democrats to forecast economic trouble (87% vs. 71%).
Inflation
remains the top concern
Thirty-eight
percent of small business owners say inflation is their biggest concern, twice
as many as the second place “supply chain disruptions” (19%) and well above
Covid-19 (13%) and labor shortages (13%).
A majority
of small business owners (75%) surveyed say they’re currently experiencing a
rise in the cost of their supplies. But as much as they need to offset those
rising costs by raising prices, the CNBC survey finds more are hesitant to pass
on price hikes to consumers who are already hard-hit by inflation.
The
percentage of those raising prices is down from 47% to 40% quarter over
quarter. Just 17% say now is a good time for businesses to raise prices in
general, about half the number (35%) who say now is a bad time to raise prices.
Almost half (47%) have mixed opinions on whether now is a good or bad time to
raise prices.
While this
finding contrasts with other recent small business surveys showing that price
increases are still a requirement for the majority of small businesses given
the input cost inflation, the CNBC data matches a bleaker business outlook
found in other recent Main Street data.
The
National Federal of Independent Business monthly surveying shows the outlook
for business conditions at the lowest level in its history, and that bearish
view has increased sharply. The percentage of small business owners who expect
conditions to be worse in the next six months hit a net negative 49% in March,
the most recent month for which data is available, increasing from a net negative
of 35% in the previous month. In August, that reading was at a net negative
28%.
“The
inflation pressures have continued, and now seem more built-in and
foundational,” said Holly Wade, director of the NFIB Research Center. “It
really is a concern about the ability to operate a business going forward, and
it is incredibly stressful to find ways to balance absorbing the price
increases from inputs and the level to which those price increases are passed
along. ... Something has to break and it will likely be a recession,” she said.
“They can
only do so much,” said Eric Groves, co-founder and CEO at online small business
platform Alignable. “They are already inhibited from getting all the inventory
they want, and the only way they get out of this is to bring customers back and
drive more revenue, and they are struggling to figure it out.”
His firm’s
research on small business anticipation of sales back to pre-pandemic levels
continues to shift out in time. Since the end of 2021, every month of its data
has shown a shift in outlook in when Main Street expects to be back to full
recovery. At the beginning of this year, the expectation was Q1 of 2023, now it
is Q4 2023.
“The
customers are not coming back as fast as they thought and inflation is
squeezing margins. And with all of that going on, it is not surprising that the
sentiment is that a recession is coming,” Groves said. “The ability to shift
pricing to customers is not as strong as it is for a big box business.”
The
challenge for many on Main Street has been the ability to access inventory they
need to sell at a competitive rate, which remains much lower than for a big
retailer. “They are not getting their fair share of the widget,” he said.
The
percentage of small businesses indicating they are back to at least 90% of
pre-pandemic revenue, which had been a sign of health, is dropping again,
according to Alignable, from 40% to 27% in its most recent data, as they
attempt to compete against much better economics of scale.
Timing a
recession call
Even the
best market pundits have a weak track record at calling a recession, at least
the exact timing, and there is no reason to expect that small business owners
are any better at pinpointing this economic turning point. But such a negative
view on the economy coming from a large component of it is significant.
This hasn’t
shown up in the Q1 business investment figures, which were solid, but a recent
slowing in core durable goods shipments in the past two months suggests a
slowing in the pace of business investment in Q2, according to Kathy
Bostjancic, chief U.S. economist at Oxford Economics. “However, it is too early
to say we are seeing a turning point and long lasting slowing in capex,” she
said.
Consumer
sentiment is down sharply, according to the University of Michigan, but
consumers continue to spend at a healthy clip and the Conference Board
sentiment measure is higher, reflecting its consumer survey focus on the labor
market, which remains hot.
Right now,
with inventory levels so low, in large part due to the supply chain
disruptions, companies need to continue to invest to rebuild inventory levels,
as well as invest in technology for productivity gains, especially with the
cost of labor so high. Business owners may be hiring less and doing more work
themselves, but to recruit and retain any staff right now is likely critical to
increasing sales as well.
These
requirements in the supply chain and labor market are adding to the stress
level on Main Street, and ultimately, “it can exert a real economic impact,”
Bostjancic said. “Business owners’ confidence levels can directly impact their
investment decisions and hiring as well.”
“They are
not seeing how the current environment is sustainable,” Wade said. “Consumer
spending is strong and GDP is strong, but the stress they are feeling in trying
to absorb these costs and fill positions and continue to increase compensation
for retention and recruitment is all incredibly stressful,” she said.
Robert Fry,
an economist who is among the respondents to CNBC’s Fed Survey, remains of the
view that a recession does not hit until late 2023, and he cited the words of
Rudi Dornbusch, a famous MIT economics professor who taught central bankers: “A
crisis takes a much longer time coming than you think, and then happens much
faster than you thought.”
He views
the current environment as still more rooted in negative sentiment than actual
negative data. “Three variables drive sentiment. The unemployment rate, the
stock market, and the price of gasoline. And it’s not a weighted average.
People just grab one at a time, and right now it’s gasoline prices.”
“Ultimately,
I think small businesses will be right, they’re just early,” Fry said. “They
don’t appreciate the lags of monetary policy. ... people cry wolf for a long
time, but the wolf eventually comes.”
Groves said
how small business owners define recession may be less academic and more a
reflection of just how tough their current operating conditions are, and what
it will take to recover to pre-pandemic levels, and their ability to sustain
the business through the next few years.
Inflation
putting pressure on margins, pushing back revenue goals and shifting out the
timeline to full recovery, puts everything at risk for small business owners.
“It’s going to be more of a slog,” Groves said, and to a business owner, that
may feel like recession, regardless of the formal economic research. “I don’t
know what going into recession means versus the operating margins of my
business being challenged, and how much I have to spend on things. ... and I
have an econ degree,” he said. “You put your head down and do whatever you need
to do to survive, and you do more with less, and you see them working more
hours. Owners have to figure out a way through it.”
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