Main Street believes the economy will be hit by a recession this year

Main Street and Wall Street are often far apart when it comes to the state of the economy. The probability of a recession in 2022 is the most recent example. Both camps are declining, but small business owners are leading the negative sentiment — by a notable margin.

Wall Street has been consumed by the Federal Reserve’s efforts to fight inflation, which it had misjudged for too long, and the risk that rate hikes will lead to a recession. A poll by CNBC earlier this week found that more than half of economists and investment professionals expect the Fed to fail in its mission to bring about a “soft landing” for the economy. The stock market breathed a sigh of relief on Wednesday, with shares surging after Fed Chair Jerome Powell said a more aggressive 75 basis point rate hike is not under consideration and that the central bank remains confident it can bring inflation down , without bringing down the economy.

The market gave back those brief gains on Thursday and on Main Street, the central bank’s announcements were unlikely to bring near-term relief. According to the latest CNBC|SurveyMonkey Small Business Survey for Q2 2022, eight in ten small business owners expect a recession this year. Inflation remains the top concern for small business owners surveyed by CNBC, and their business prospects are negative. The survey found that few small business owners see any bright spots in the current economy: only 6% rate the current state as excellent and 18% as good, while 31% rate it as fair and 44% as poor.

While the survey’s small business confidence index rose for the first time in the Biden administration, due to responses to core index questions on immigration policy and a 3 percentage point rise (to 36%) among small business owners who described their current business conditions as good, it remains in the Near its all-time low and well below its pre-pandemic baseline.

“There’s just not a lot of optimism on Main Street these days,” said Laura Wronski, senior manager of research science at Momentive, which conducts the poll for CNBC.

SAN FRANCISCO, CA – APRIL 28: Deanna Sison takes a break from preparing pre-ordered lunches to check the status of her small business loan application at Little Skillet Restaurant on Tuesday, April 28, 2020 in San Francisco, California. Most of Covid’s financial relief for small businesses has now ended, but the need for more funding remains.

San Francisco Chronicle/hearst Newspapers via Getty Images | Hearst Newspapers | Getty Images

Small business survey results can be influenced by politics, with the community being conservative, but economic concerns run high for all small business owners. Those who identify as Republican or GOP-leaning lead the bearish outlook, with 91% expecting a recession, but among those who are Democrats or Democratic Party-leaning, 66% still expect a recession this year.

The survey was conducted by Momentive between April 18 and April 25 among a national sample of 2,027 self-identified small business owners.

In a parallel poll of the general public conducted for CNBC, an almost identical 77% expect a recession this year, with Republicans more inclined than Democrats to forecast economic problems (87% vs. 71%).

Inflation remains the biggest concern

38% of small business owners say inflation is their number one concern, twice as many as “supply chain disruptions” (19%) and well ahead of Covid-19 (13%) and labor shortages (13%).

A majority of small business owners surveyed (75%) say they are currently seeing an increase in the cost of their consumables. But as much as they need to offset these rising costs with price increases, the CNBC survey shows that more companies are reluctant to pass on price increases to consumers who are already badly hit by inflation.

The percentage of those price increases has dropped from 47% to 40% quarter over quarter. Just 17% say now is a good time for companies to raise prices in general, with around half (35%) saying 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 result contrasts with other recent small business surveys, which show that price increases are still a requirement for the majority of small businesses amid input cost inflation, the CNBC data is consistent with the gloomier business outlook reported in others current Main Street data were found.

The National Federal of Independent Business monthly survey shows the outlook for business conditions at the lowest level in history, and that bearish assessment has grown sharply. The percentage of small business owners who expect conditions to worsen over the next six months hit a net decline of 49% in March, the latest month for which data is available, rising from a net decline of 35% in the previous month. In August, this figure was minus 28%.

“Inflationary pressures have continued and now appear to be more built-in and fundamental,” said Holly Wade, director of the NFIB Research Center. “It’s really a concern about the ability to run a business going forward and finding ways to offset the absorption of the price increases by inputs and the level at which those price increases are passed on is incredibly stressful. … Something has to pause and there will probably be a recession,” she said.

“You can only do so much,” said Eric Groves, Co-founder and CEO of online small business platform Alignable. “They’re already blocked from getting all the inventory they want and the only way they’re getting out of that is by bringing customers back and getting more sales, and they’re struggling to figure it out.”

His firm’s research on anticipating small business sales back to pre-pandemic levels continues to shift over time. Each month since late 2021, data has shown a shift in the outlook for when Main Street expects a return to full recovery. Earlier this year the expectation was Q1 of 2023, now it is Q4 2023.

“Customers aren’t coming back as quickly as they thought they would, and inflation is squeezing margins. And with all of this, it’s not surprising that there’s a sense that a recession is looming,” Groves said. “The ability to shift pricing to customers isn’t as strong as it is in a big deal.”

The challenge for many on Main Street has been the ability to access the inventory they need to sell at a competitive price that’s still much lower than a major retailer. “They don’t get their fair share of the widget,” he said.

The percentage of small businesses who say they’re back to at least 90% of pre-pandemic revenue, which was a sign of health, falls again from 40% to 27% in its latest data, according to Alignable, trying against much better economies of scale to compete

timing of a recession

Even the best market experts have a poor track record of declaring a recession, at least when it comes to timing, and there’s no reason to think small business owners are any better at pinpointing this economic tipping point. But such a negative view of the economy coming from a large part of it is significant.

That wasn’t reflected in solid Q1 business investment numbers, but a recent slowdown in key durable goods supplies over the past two months points to a slowdown in the pace of business investment in the second quarter, according to Kathy Bostjancic, chief US economist at Oxford Economics. “However, it is too early to say that we are seeing a turning point and a prolonged slowdown in capital spending,” she said.

Consumer sentiment has fallen sharply, according to the University of Michigan, but consumers continue to spend at a healthy rate and the Conference Board sentiment gauge is higher, reflecting the consumer survey’s focus on the still-hot job market.

Especially now that inventories are so low, largely due to supply chain disruptions, companies must continue to invest to rebuild inventories and invest in technology to increase productivity, especially with high labor costs. Business owners may be hiring less and doing more work themselves, but recruiting and retaining employees now is also likely critical to increasing sales.

These supply chain and labor market demands are increasing stress levels on Main Street, and ultimately “it can have real economic implications,” Bostjancic said. “Business owners’ confidence can also have a direct impact on their investment decisions and attitudes.”

“You don’t see how sustainable the current environment is,” Wade said. “Consumer spending is strong and GDP is strong, but the stress they feel as they try to absorb those costs and fill positions and keep increasing compensation for retention and hiring is all incredibly stressful,” he said you.

Robert Fry, an economist who is a respondent to CNBC’s Fed survey, remains of the view that a recession will not come until late 2023, and he quoted the words of Rudi Dornbusch, a famous MIT economics professor who taught central bankers: ” A crisis lasts much longer than you think and then happens much faster than you thought.

He sees the current environment as even more based on negative moods than on actual negative data. “Three variables determine the mood. The unemployment rate, the stock market and the price of gas. And it’s not a weighted average. People just take one at a time, and right now it’s gas prices.”

“Ultimately, I think small companies will be right, they’re just too early,” Fry said. “They don’t appreciate the delays in monetary policy. … people yell wolf for a long time, but eventually the wolf comes.”

Groves said how small business owners define a recession may be less academic and more a reflection of how difficult their current operating conditions are and what it will take to get back to pre-pandemic levels, and their ability to sustain the business for years to come .

Inflation, which puts pressure on margins, pushes back sales targets, and delays the timeline for a full recovery, puts everything in jeopardy for small business owners. “It’s going to be more of a grind,” Groves said, and to a business owner, that may feel like a recession, regardless of formal economic research. “I don’t know what going into a recession means compared to my company’s questioned operating margins and how much I have to spend on things … and I have an economics degree,” he said. “You put your head down and do whatever you have to do to survive and you do more with less and you see that they work more hours. The owners have to find a way to deal with it.” Main Street believes the economy will be hit by a recession this year

Gary B. Graves

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