Now may be the time for small businesses to hunker down and prepare for worse times to come. While the pandemic may no longer be a significant factor in planning, there’s talk of a recession—will it or won’t it happen? No one knows for sure, but some economic indicators are pointing toward a recession, or at least very slow growth period.
There are various economic indicators that business owners can watch to know whether it’s a good time to expand or to bide your time. The traditional 5 include:
- Gross national product (GDP)—the market value of all final goods and services produced within the country during a set period.
- Unemployment rate
- Consumer price indices (CPIs)—the measurement of consumer goods and services (with different indices including or excluding certain items).
- Central bank minutes—the monetary policy of the Federal Reserve
- Purchasing managers’ index (PMI)—the acquisition of goods and services by purchasing managers.
There are many others. I’d like to suggest a few of my own (I didn’t create these indicators; I just chose them).
5 other economic indicators impact small businesses
Yes, it’s bad, though not as bad as I recall in the late 1970s and early 1980s when the inflation rate was double digit. Trading Economics reports the annual inflation rate in the U.S. slowed to 8.3% in April from a 41-year high of 8.5% in March. The overall inflation rate for 2022 is expected to be about 7% compared with a historic norm of about 3%. Inflation isn’t necessarily tied to recession (although there was one in the early 1980s when there was very high inflation), but it’s certainly problematic for small businesses. High inflation pushes up prices and wages, and it’s hard for small businesses to keep up with both.
2. Savings rate
The personal savings rate in the U.S. dipped to 4.4% in April 2022. The personal savings rate is income left over after people spend money and pay taxes is personal saving. The personal saving rate is the percentage of their disposable income that people save. This is the lowest rate since 2008, which was the start of the last recession. Usually, a sharp drop in the savings rate is, according to some economists, a warning sign about the sustainability of spending. Even if there is no recession, the low savings rate points to less money that consumers have to spend on purchases from you.
3. Price of crude oil
The price of crude oil translates into higher prices for gasoline at the pump and could suggest a recession is about to occur. In 2008, crude oil reached a record high of $145 per barrel, which is the same year for the start of a recession. The price currently is over $110 per barrel and is expected to be about $115 per barrel by year end. As a result, there are record-high prices at the pump now, with a gallon of regular gas nationwide averaging $4.62 on May 30, 2022; it’s more than $6 in California and more than $5 in Alaska, Hawaii, Nevada, Oregon, and Washington. While there may not be gas shortages—and gas lines—like there were in the 1970s, the continuing rise of the price of crude oil can’t be ignored. For small businesses with vehicles used for deliveries, decisions must be made about how to handle the situation—raise prices overall? impose a surcharge?
4. Consumer debt
Consumer debt includes home mortgages, credit card debt, student loans, car loans, and other personal borrowing. Repayment of this debt taps consumer dollars, leaving less available to buy goods and services. Consumer debt goes hand in hand with the savings rate. Consumer debt rose 1.7% in the first quarter of 2022 to $15.84 trillion, which is a record high. Does this mean a recession is imminent? According to one economist, “The US economy experienced a very significant rise in household debt leading up to the Great Recession [2008-2012].” As with other indicators, don’t ignore this one, which suggests there’s reason for concern.
5. Global events
Small businesses can’t ignore the impact from what’s happening abroad, especially the war in Ukraine and a potential worldwide food crisis. Global events impact prices for goods and services, supply chains, and consumer demand. The International Monetary Fund (IMF) has some pessimistic predictions on GDP in various countries. For example, in the UK, GPD was 7.4 in 2021, but is expected to be only 3.7 this year and 1.2 next year. Again, it’s not certain that global events will trigger a recession, but they certainly don’t help.
Economic indicators currently moving in a negative direction aren’t comforting. But having this information allows small businesses to revise their business plans. This may include, for example, minimizing purchasing orders to keep inventories down, raising prices to factor in inflation and higher gas prices, and holding off on additional hiring in case business slows up.
The old saying (attributed to British Prime Minister Benjamin Disraeli): “Prepare for the worst, hope for the best” certainly rings true today.