Main Street is convinced the recession will hit the economy this year

Main Street and Wall Street are often far apart when it comes to the state of the economy. The last example is the likelihood of a recession in 2022. Both camps are bearish, but small business owners lead the negative sentiment by a notable margin.

Wall Street has been preoccupied with the Federal Reserve’s efforts to fight inflation, which it has misunderstood for too long, and the risk that higher interest rates will lead to a recession. A poll earlier this week by CNBC found that more than half of economists and investment professionals expect the Fed to fail in its mission to create a soft landing for the economy. But in any case, the stock market breathed a sigh of relief on Wednesday as stocks surged after Fed Chairman Jerome Powell said a more aggressive 75 basis point rate hike was out of the question and that the central bank remained convinced it could bring inflation down. . without destroying the economy.

The market rallied these short-term gains on Thursday, and on Main Street, central bank announcements are unlikely to bring any short-term relief. According to the latest data, eight out of ten small business owners expect a recession this year. CNBC|Small Business Survey SurveyMonkey for the second quarter of 2022. Inflation remains a top concern for small business owners surveyed by CNBC, and their business outlook is negative. The study found that few small business owners see any positives in the current economy: just 6% rate the current state as excellent and 18% as good, 31% rate it as fair, and 44% rate it as poor.

While the survey’s Small Business Confidence Index rose for the first time in the Biden administration due to answers to key index questions related to immigration policy and a 3 percentage point increase (up to 36%) among small business owners who described their current business conditions as well, it remains 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 Wronsky, senior research science manager at Momentive, which conducts the poll for CNBC.

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

Newspapers San Francisco Chronicle/Hearst Via Getty Images | Hearst Newspapers | Getty Images

Small business survey results may be affected by politics as the community leans towards conservatism, but economic concerns are high among all small business owners. Those who identify as Republicans or lean towards the Republican Party are bearish: 91% expect a recession, but among those who are Democrats or lean towards the Democratic Party, 66% still expect a recession this year.

The survey was conducted by Momentive between April 18 and 25 among 2,027 small business owners nationwide.

In a parallel poll of the general public for CNBC, a near-identical 77% expect a recession this year, and once again, Republicans are more likely than Democrats to predict economic trouble (87% vs. 71%).

Inflation remains a major problem

Thirty-eight percent of small business owners say inflation is their biggest concern, twice as much as “supply chain disruptions” (19%) and much higher than Covid-19 (13%) and labor shortages ( thirteen%).

The majority of small business owners surveyed (75%) say they are currently experiencing an increase in the cost of their products. But while they need to make up for those rising costs with higher prices, CNBC research shows that more people are hesitant to pass on price increases to consumers who have already been hit hard by inflation.

The share of those who raise prices fell from 47% to 40% on a quarterly basis. Only 17% say now is a good time to raise prices in general, and about half of those (35%) who think now is not a good time to raise prices. Nearly half (47%) are ambivalent about whether now is a good or bad time to raise prices.

While this finding contrasts with other recent small business surveys showing price increases are still a requirement for most small businesses, given input cost inflation, the CNBC data is in line with the bleaker business outlook found in other recent Main Street data.

The National Federation of Independent Business Monthly Review shows that business conditions forecast is at its lowest level ever, and that bearish outlook has sharpened sharply. The percentage of small business owners who expect conditions to worsen in the next six months hit a net negative 49% in March, the most recent month for which data is available, up from a net negative 35% the previous month. In August this value was negative 28%.

“Inflationary pressures persist and now seem more natural and fundamental,” said Holly Wade, director of the NFIB Research Center. “It really raises concerns about the ability to do business in the future, and it’s incredibly difficult to find ways to balance absorption of price increases through inputs and the level to which those price increases are passed on…Something has to be interrupted, and that’s probably there will be a recession,” she said.

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“They can’t do much,” said Eric Groves. co-founder and CEO of online small business platform Alignable. “They can no longer get all the inventory they need and the only way to get out of this is to bring back customers and increase revenue, and they are struggling to figure that out.”

His firm’s study of small business expectations as sales return to pre-pandemic levels continues to drift in time. Since the end of 2021, every month its data shows a change in the forecast as to when Main Street expects a full recovery. At the beginning of this year, the first quarter of 2023 was expected, now it is the fourth quarter of 2023.

“Customers are not returning as quickly as they thought, and inflation is cutting into profits. And given all of this, it’s not surprising that it looks like a recession is coming,” Groves said. “The ability to pass prices on to customers is not as strong as big business.”

The problem for many on Main Street has been being able to access the inventory they need to sell at a competitive price that remains well below that of a major retailer. “They don’t get their fair share of the widget,” he said.

The share of small businesses indicating they are back at least 90% of pre-pandemic revenue, which was a sign of health, is dropping again, according to Alignable’s latest data, from 40% to 27% as they attempt to compete with much better economies of scale.

Recession Call Timing

Even the best market experts can’t give a recession, at least not an exact date, and there’s no reason to expect small business owners to be any better at pinpointing this economic turning point. But such a negative view of the economy, coming from a large part of it, is of great importance.

This was not reflected in business investment performance in the first quarter, which was robust, but the recent slowdown in key durables shipments over the past two months suggests a slowdown in business investment in the second quarter, according to Cathy Bostancic, chief US officer. 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 plummeted, but consumers continue to spend at healthy levels, according to the University of Michigan, and the Conference Board’s sentiment score is higher, reflecting its focus on a job market that remains hot.

Right now, with inventory levels so low, due in large part to supply chain disruptions, companies need to keep investing in restoring inventory levels as well as investing in technology to improve productivity. especially at such a high labor cost. Business owners can hire less and do more of the work themselves, but hiring and retaining any staff right now is probably also critical to boosting sales.

These demands in the supply chain and the labor market are adding to the stress levels on Main Street, and ultimately, “it could have a real economic impact,” Bostancic said. “Business owners’ level of trust can directly influence their investment decisions and hiring.”

“They don’t see how resilient the current environment is,” Wade said. “Consumer spending is high and GDP is high, but the stress they are under trying to cover those costs, fill vacancies and keep increasing retention and hiring compensation is incredibly stressful,” she said.

Robert Fry, an economist who took part in a CNBC Federal Reserve poll, remains of the opinion that a recession will not come until the end of 2023, and he quoted Rudy Dornbusch, a renowned MIT economics professor who has educated central bankers: The crisis is coming much longer than you think, and then it happens much faster than you think.”

He believes that the current situation is based more on negative sentiment than actual negative data. “Mood is determined by three variables. The unemployment rate, the stock market and the price of gasoline. And it’s not a weighted average. People are just taking one at a time, and right now it’s gas prices.”

“Ultimately, I think small businesses will be right, they’re just early,” Fry said. “They don’t appreciate the backlog of monetary policy… people scream for wolves for a long time, but the wolf eventually comes.”

Groves said how small business owners define a recession may be less academic and more a reflection of how dire their current operating conditions are, what it will take to recover to pre-pandemic levels, and their ability to sustain business over the next several years. years.

Inflation that is putting pressure on margins, pushing back revenue targets and pushing the timeline towards a full recovery puts everything at risk for small business owners. “It’s going to be rather exhausting,” Groves said, and for a business owner, this could look like a recession, regardless of official economic research. “I don’t know what a recession means compared to how the operating margin of my business is being questioned and how much I have to spend on things… and I have an economics background,” he said. “You put your head down and do whatever it takes to survive and you do more with less and you see them working more hours. The owners need to find a way out of this.”

Join us today for the CNBC Small Business Playbook virtual event, where business leaders and experts will discuss topics on Main Street, from managing inflation and labor shortages to new ways to secure funding. Register now:

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