American Small Businesses are Still Pessimistic About the Economy and Inflation

Stocks have seen significant gains to start the year, with the S&P 500 up 8%, on expectations that the economy will experience a soft landing. Goldman Sachs has decreased its forecast for a recession on Wall Street. Employers created more than 500,000 new positions last month, which helped to strengthen that forecast. The "disinflationary process has begun," according to a statement from the Federal Reserve last week, but Main Street hasn't felt the recent wave of optimism, which includes CEOs in revision mode and more cautious central bankers as well as unrestrained retail investors.

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According to Trade Algo, over half of the small business owners (47%) believe the economy is already in a recession, with a nearly identical number (48%) calling it "bad."

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Notably, despite an improvement in the market and economic optimism, the data is almost identical from Q4. Investors' increased optimism is attributed, in part, to the fact that stocks have already priced in a recession, particularly a mild one, which many CEOs and economists anticipate. CEOs who anticipate a severe recession have decreased from 13% to 5%, according to the most recent Business Council survey of CEOs. On Thursday's "Squawk Box" on Trade Algo, former Fed vice chair Roger Ferguson discussed such findings and predicted that the recession would be brief. The CEOs in this group are less gloomy generally than in the past, but they are still not hopeful.

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Small firms are, in a way, over their own peak recession worries as well; in Q3 of last year, 57% of them believed the economy was in a recession, which is significantly higher than it is right now. Even though there are many indications that inflation, at least in goods and the supply chain, is rapidly dropping, small companies continue to be pessimistic and lack trust in the Fed's ability to manage inflation (31% believe it is up to the task).

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"The Fed's role is to forecast what it expects will happen in the future and to assist everyone in getting ready for it. Small company owners continue to tell us that the economy is unpredictable, that recruiting is difficult, and that inflation is a problem. Because small businesses continue to report being trapped in a very recession-like environment despite clear signals from Powell that the worst is over, these metrics will be crucial to keep an eye on in the coming quarters, according to Laura Wronski, senior manager of research science at Momentive, which conducts the small business survey for Trade Algo.

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From January 23 to January, the Q1 survey was carried out. 30 out of the nation's 2,300 small company owners.

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Small enterprises may occasionally serve as a lagging indicator. An illustration is an inflation.

Holly Wade, executive director of the NFIB Research Center, noted that small business owners had a harder time reaping the benefits of economies of scale. Her own recent poll of small business owners revealed ongoing pessimism. Its upcoming poll is scheduled to release on Tuesday.

Small enterprises frequently require more time, according to Wade, whether it be for inventory management or trying to negotiate better prices in contracts. 

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We are lower on the food chain. Small firms take longer to experience the effects of deflation.

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Small Company Owners' #1 Issue Is Still Inflation.

Almost 75% believe it has not yet reached its peak.

According to the most recent Trade Algo statistics, 75% of small business owners still experience growing supply costs and 51% supply chain disruptions.

The NFIB does observe a decrease in price pressures, which is encouraging, but Wade continued, "Many are still experiencing the interruptions and finding it difficult to secure product or inventories. Although it's not as serious as it was last summer, it's still a problem, and it will take a lot longer for small businesses to adjust.

Although energy costs have decreased, Ken Simonson, chief economist for The Associated General Contractors of America, claimed that for companies that depend on it for electricity and transportation, natural gas prices remain high and diesel prices are significantly higher than they were a year ago. Furthermore, despite a slowdown in the growth of average hourly earnings, labor expenses are still rising significantly. These are expenses that won't go anytime soon, he said.

According to Trade Algo, 29% of small businesses have open positions that have been unfilled for at least three months, and 66% are increasing salaries to attract new hires.

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The Traditional Signs Of A Recession In Sales And Employment

When predicting the general path of the economy, sales expectations are a concerning sign. According to the NFIB data, future sales uncertainty is connected with uncertainty about the macroeconomy. Wade noted that there was still a long way to go before the climate was more suited for running enterprises. She noted that when NFIB inquires about business expansion plans for the upcoming six months, "they are typically pretty negative."

The National Association for Business Economics' most recent statistics on projected sales also indicates a recession. The percentage of respondents who anticipate their company's revenues increasing over the next three months significantly decreased in the NABE Business Conditions Survey for January. According to NABE survey spokeswoman Simonson, "Such low percentages in the retroactive 3-month data match with recessions."

According to Simonson, the NABE poll results on employment forecasts for the upcoming months also indicate "quite a retreat." These, in his opinion, are the two perspectives on the recession. "Is consumer spending growing? Is employment growing? If the answers are 'no' to both questions, then there is a recession."

Due to the Fed's increases, most corporate loans now have interest rates in the double-digit percentage range, which is contributing to business trepidation about expansion. According to a Trade Algo survey, 37% of business owners say that increased interest rates have forced them to cut down on business spending this year, 31% say that access to money and loans has worsened, and 14% say they have been forced to look for new sources of financing or equity.

The percentage of small business owners expecting revenue to grow over the next year increased by 5 percentage points quarter over quarter to 43%, a small but significant improvement off all-time lows hit during the past two quarters, according to the Trade Algo survey, which indicates a slightly better outlook on sales. And from 28% two quarters ago to 20% right now, fewer owners anticipate a drop in sales. With the exception of the Covid outbreak in Q2 2020, the third quarter of last year's third year saw the highest sales pessimism at 28%.

Even as the spokesperson for the NABE poll, Simonson is wagering that in this economy, forward-looking pessimism will prove to be incorrect, more influenced by the news stories that business owners, like the general public, are reading — just take a look at egg prices — than the actual truth. Look at these polls; most people believe that we are experiencing a recession. excessive inflation albeit it is at a 50-year low. ... How important are plane tickets when you consider that housing makes up 40% of the CPI and that food and electricity are also taken away? He said, "

He claimed that order books in his sector of the construction industry, which does not include single-family homes, are full and companies are declining projects because they cannot find enough personnel to complete the ones they have already committed to.

When expressing his view that the U.S. economy can still produce growth in 2023, Fed Chair Powell particularly mentioned this sector during his most recent FOMC press conference. "Both governmental and private investment in construction is expected to increase significantly. Therefore, that will encourage economic activity. Therefore, I believe there is a significant likelihood that those elements will contribute to this year's excellent growth. And that's my base assumption—that this year will see positive growth.

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Politics Influences The Outlook On Main Street

Any small company poll that has a demographic that leans conservative will include questions about politics.

"These comments, as well as all current polls on the economy, are undeniably partisan in nature. Republicans make up a larger percentage of small company owners than Democrats, and Republicans tend to be more negative about inflation, jobs, the possibility of a recession, and the state of the economy in general during Joe Biden's presidency, according to Wronski. There haven't been any notable changes in Republican sentiment over the past two years, which is one of the reasons our Small Business Confidence Index has remained inside such a small range.

According to the study results, 57% of small business owners who identify as Republicans and 50% of independents believe the economy is already in a recession, compared to just 28% of those who identify as Democrats. Despite this, only 21% of Democrats surveyed stated they don't anticipate a recession between now and 2024.

The Small Business Confidence Index for Q1 Trade Algo increased by two points to a score of 45/100. Main Street confidence hasn't changed much throughout Joe Biden's administration; it's constantly ranged between 42 and 46 points, or a four-point range. Contrary to last quarter, when Biden's Main Street approval rating saw its first-ever increase, it is currently back down around an all-time low.

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Unease With The State Of The Economy

The high level of uncertainty, which Simonson claimed is consistent with the NABE statistics, is another factor influencing the prognosis. The likelihood that the U.S. economy is either in a recession or will experience one over the next 12 months is better than 50-50, according to more than half of NABE respondents. However, 40% of NABE survey participants said they do not anticipate a recession. More uncertainty and disagreement than ever exist on whether or not a recession is on the horizon, according to Simonson.

Many market participants have noted how the current economy is unlike any you could find in an economics textbook from the previous century, from Warren Buffett to Fed Chair Powell. Wade claimed that recent small company survey data should be viewed with the same degree of care. Generally speaking, every recession has been accompanied by declining workforces and lower sales, as well as a "full fire sale situation," she noted. It's not like that anymore. We are in a different climate now that the job market is tight and there is inflation. ... It's just a different environment than what we're used to, although some company procedures support a typical recession call, she said.

Small business owners' lives are becoming more stressful as a result. "There are predictable methods to manage a recession, but there aren't any for small firms to follow in this one. Just navigating a very different atmosphere," Wade added. "It's still a challenging scenario for a small business owner whether we're in a recession or not, or whether we move into a recession or not."

On this issue, the Fed concurs with Main Street. If you look at the last ten times there was a global pandemic and we shut the economy down, you can see that this is not a typical business cycle. Congress acted as it did, and we acted as we did. Simply put, it's distinctive. Therefore, in this case, certainty just isn't appropriate, Powell said following the FOMC meeting.

The Trade Algo survey's most encouraging finding may be that, regardless of what the economy turns out to be, 65% of small business owners say they are ready to weather a downturn. Over the previous quarter, that increased.