It was a question I was ill prepared for, but it weighed heavily on my client’s mind. He was about to invest a significant amount of his hard-earned money to expand his business but was the timing right? He has been watching the economy and listening to the pundits who are predicting a possible looming recession. Of all my business consulting sessions recently, his question seemed to be the most daunting. I certainly see the tea leaves of a recession but is there more to this that warrants sounding the alarm bells and stopping my client from expanding. I am extremely cautious when it comes to advising a client to spend money.
When you look at the dry numbers, there are signs that we are heading for a steep skid. I am not only speaking about the raging inflation but the unexpected contraction in the first three months of 2022, when the economy actually shrank at a 1.4 percent pace, mostly because of a trade imbalance and a drop in inventory purchases. So, we are no longer speaking about the rate of growth but by what percentage of how much we are slipping. Does this portend that a recession is on its way?
Bank of America research economists caution to say not so fast! They do not expect a recession in 2022 but instead are predicting a growth slowdown, which is of course quite different from an actual recession. They probably see what we all know already: the war in Ukraine with its ramifications on energy prices and wheat supplies, for example, supply-chain issues, China’s COVID-19 lockdowns, and central bank interest rate increases. But somehow they do not see these events as synchronized and in a way look at it as a passing storm that may already have passed. In other words, while they agree that these were colossal events they feel that they are not sufficient to turn the economy on its side and usher in an era of inflation.
Instead of an all-out recession, the Bank of America team sees U.S. GDP growth falling to 2.6% this year and 1.5% in 2023 but they also argue that inflation will moderate from current levels and the economic slowdown will largely be a result of the Federal Reserve raising interest rates. That means it will be easier to reverse if a recession rears its head.
So much for optimism. 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 forestall a recession. There appears to be somewhat of a disconnect between Wall Street and what we refer to as Main Street. Eight in ten small business owners are convinced the U.S. economy will enter a recession this year, according to the latest CNBC Small Business Survey. It is the small business sector like the client I am consulting that I am worried about because their actions have a significant effect on our communities.
“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. There is a good reason for this negative feeling. In general, many have still not recovered from the Covid-19 era. While they may have been temporarily helped with a cash infusion from the Feds, they still need capital for inventory or capital projects.
In a parallel survey of the general public conducted for CNBC, a nearly identical 77% expect a recession to occur this year, predictably with Republicans more apt than Democrats to forecast economic trouble (87% vs. 71%). It does not help that the general public does not have more confidence which can have repercussions in how they behave in the marketplace and having a negative impact on small business.
Why does such a sizable portion of small business think that a recession is on its way?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%). One must believe that the slow return of the pre-Covid era customer is having a negative impact on the psyche of the small business owner.
Small business owners are already experiencing a spike in the cost of goods. The obvious answer would be for them to pass on these increases to consumers but ironically it is far from being an automatic. While 17% say now is a suitable time for businesses to raise prices in general, almost half (47%) have mixed opinions on whether now a good or bad time is to raise prices. It is quite amazing that small business owners facing the crunch of higher prices still feel for their customers.
This climate of uncertainty is what was so troubling for my client and probably the reason he reached out to a business consultant like myself. He obviously does not wish to expand his business if his customers will not come or even if they do spend far less because of a recession. This climate is also causing some angst amongst potential investors and clearly having an impact on the stock market.
So far investors are not dropping out. This did not show up in the Q1 business investment figures, which were solid, but a recent slowing in core durable goods shipments 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.
So here we are well into Q2 without any firm evidence that we are either heading into a recession or about to avoid one. Both the optimists and pessimists while basing their attitudes on what they consider hard facts cannot give the definitive prognosis for the economy. One business associate told me frankly: “The only thing that is worse than a recession is this uncertainty about a recession since waiting it out does not help but instead makes it worse.”
My client certainly was not happy to hear about this mixed forecast since he was really looking for assurances in moving forward. Let us hope that this fog clears up so that we have a clear GPS in moving ahead!