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The remainder of 2022 will be tricky for small business owners to navigate. High prices, tightening labor markets, rising rates, and slowing economic growth will provide a number of challenges.
The forces influencing the U.S. economy have impacted each business sector differently. Here is a breakdown of the economic outlook for the top small business industries in Q2 2022.
Leisure and Hospitality
As the economy continues to reopen, no sector will benefit more than leisure and hospitality. Travel-related businesses report a significant uptick in bookings and restaurants are often at capacity and enjoying sales above pre-pandemic levels.
The biggest impediments to this sector are the loss of workers during the pandemic that have found employment in other sectors, leaving many operators short-staffed. Despite the rise in commodity costs, most businesses have seen little impact to demand due to increased prices. It should be a strong year for this sector.
Related Reading: 5 Tips for Boosting Employee Retention During a Tight Labor Market
There has been a resurgence in brick-and-mortar retail. E-commerce sales peaked in 2020 and have been gradually returning to pre-pandemic growth levels. This switch back to in-person shopping bodes well for small business retailers.
However, the overall retail climate is beginning to soften and likely will continue to throughout 2022. As consumers grapple with negative real wages, their purchasing power is being diminished. The decline in retail sales in February and March (when adjusted for inflation) appears to be an ominous sign for the retail sector. The outlook for small business retailers is weaker this year, particularly in the second half of the year.
Professional and Business Services
This sector should continue to be strong through the rest of 2022. As companies struggle to attract and retain employees, professional and business service providers will see increased demand even as the economy slows. The primary challenge will be to find the workers needed to respond to increasing demand. The outlook for this sector is very positive.
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The real estate sector should continue to see relative strength (albeit lower levels than 2021) in the commercial space. In particular, multifamily and industrial will outperform in 2022 with retail and office seeing modest softening by the fourth quarter.
Residential will certainly see weakening as higher prices and interest rates curtail demand. Additionally, limited supplies of homes for sale will likely continue as owners are “economically trapped” in homes they have lower-rate mortgages on and will have strong incentives to stay where they are.
Real estate investors, take note: the outlook for this industry is mixed with a weaker outlook for residential a more positive one for commercial.
Not surprisingly, higher energy prices will be good for the sector in 2022. As mobility continues to increase and prices remain elevated, margins for energy-related companies will be very strong in 2022.
Expect energy prices to remain elevated through the end of the year. Despite OPEC increasing its production caps from the levels set in 2020 in response to pandemic-related slowing demand, many cartel members are unable to increase their production to the new limits. Without provisions for other members to increase their production to offset these shortfalls, supply will remain tight for a considerable time and keep upward pressure on prices.
Additionally, sanctions on Russia are creating liquidity concerns for commodities companies as hedges for price declines get margin calls causing the need for additional cash above and beyond what’s needed for higher prices. Traders are having to take out additional hedges to protect against the effects of price surges, thus adding additional costs to commodities. Again, this will likely keep upward pressure on prices through 2022. The outlook for this sector is very positive.
With a lot of pent-up demand, expect construction to remain strong for at least the next two quarters. New housing starts grew at the fastest pace since 2006, driven primarily by multifamily construction. As higher interest rates reduce demand for single-family housing, multifamily will continue to do very well. Additionally, construction for industrial space will continue to be strong in 2022.
With that, expect the construction sector to begin slowing in the fourth quarter as slower growth, tightening labor, and higher interest rates eventually impact both supply and demand in the sector. The outlook is positive with some modest slowing by the fourth quarter.
Related Reading: 3 Ways to Increase Safety on Your Construction Site
During the pandemic, manufacturing saw incredible demand driven by consumers switching from purchasing services to more goods. Expect this to reverse somewhat in 2022 with demand for services and goods to rebalance. Coupled with labor shortages, continued supply chain issues, and higher prices, both supply and demand for manufactured items will likely cool off in the second half of 2022. The outlook for this sector is for things to weaken as the year progresses.
When it comes to protecting your business’ property—regardless of which sector you’re in—it’s critical that you work with a partner that understands the intricacies of the insurance industry, as well as your specific business.
When you work with SWBC for your commercial insurance needs, you not only gain access to numerous commercial insurance coverage options to fit your business and industry needs, but more importantly, you gain a dedicated advocate that will tailor coverage to fit your needs, budget, and risk tolerance.
Blake Hastings joined SWBC as Senior Vice President of Corporate Strategy and Chief Economist in July 2021. In this role, he provides leadership in the areas of corporate development and long-term growth strategies. He also supports our business development goals and activities by leveraging external relationships in both the public and private sectors. Additionally, Blake provides direction in the assessment, evaluation, and management of risk throughout the organization. Prior to joining SWBC, Blake worked for the Federal Reserve Bank of Dallas for over 14 years. He served as a Senior Vice President overseeing the San Antonio and El Paso branch offices.