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With a possible recession on the horizon, growth normalizing, continued supply chain issues, and a tight labor market, navigating the remainder of 2022 and 2023 will be tricky for small businesses.
As SWBC’s Chief Economist, it’s my job to keep my pulse on the economic forces impacting businesses and development. In this post, I’ll discuss the economic headwinds and tailwinds small business owners are facing and give them an idea of what to expect for the rest of the year and into the next.
Executive Summary
- The U.S. economy is likely headed for a recession within the next 12 months
- As a result, hiring and business expansion will likely slow or turn negative
- The recession will likely be less severe and shorter in duration than the past two
Economic Headwinds and Tailwinds for Small Businesses
Here are the economic factors working in favor of and against small businesses in 2022:
Tailwinds
- Though we’ve seen much improvement in the public health situation, new variants and seasonal surges of COVID-19 could still be a drag on the economy.
- Demand for services is improving as we open more businesses (rebalancing of demand from goods).
- Productivity gains are improving as some supply chains begin to heal.
Headwinds
- Inflation is still high and will likely remain high.
- Despite strong wage gains, real wages are not keeping with inflation, which points to negative real wage growth.
- Consumer spending is already slowing.
- Supply chain disruptions continue in industries heavily impacted by the war in Ukraine and by China.
- Tight labor markets show signs of softening, though this will be a long-term challenge for business owners.
- Consumer and business sentiment is declining.
- Tightening monetary policy means interest rates will keep rising as the economy slows to deal with inflation.
- The Fed funds rate is expected to be 3.5-3.75% by the end of the year.
- The Fed has capitulated and all but admitted a “soft landing” of the economy is near impossible.
Outlook for U.S. Economy in 2022: Growth is Normalizing
The U.S. economy will continue to slow throughout the rest of 2022 and into 2023. Explosive growth following the pandemic is normalizing.
- Q1: 1.4% (weaker due to large inventory numbers in the 4th quarter of 2021 and high energy prices impacting net exports)
- Q2: 0.9% (inflation impacted growth)
- Q3 will likely be weak as well 1.0-1.5%
- Q4 will likely see a negative reading (beginning of a recession)
- Q1-2 of 2023 will likely see the recession continue
It’s likely to be a shallow recession and will last as long as it takes to tame inflation (approximately three quarters).
It could be a “jobfull” recession–unemployment will likely only go up to 5.5-6% (rather than the typical 7-10% seen in most recessions).
- Employers are expected to hold onto labor longer due to difficulty attracting and retaining workers during the tight labor market.
- Once the recession has ended labor markets will move back to full employment quickly.
We will probably see the Fed start lowering rates in the second half of 2023 back toward neutral (2-2.5%).
Outlook for Small Businesses by Sector
Overall, the environment for businesses will become more challenged in the rest of 2022 and early 2023.
Sectors with the most robust outlook (maybe less negative) include:
- Healthcare
- Discount Retail (trade down)
- Lower Cost Restaurants (trade down)
- Auto dealers
- Business services, outsourcing
- Some technology (improving productivity and efficiency)
- Multifamily
- Warehousing/Fulfillment operations
Business sectors that may experience more of a challenge in the coming year include:
- Manufacturing (slowing demand and supply chain issues)
- Residential real estate (increasing rates/prices)
- Financial institutions (tighter margins, slowing loan growth, and rising delinquencies)
- Energy
- Retail
- Transportation
- Hotels
- Real Estate – Housing and office
- Other services (i.e. nail and hair salons, gyms, etc.)
Q3-4 2022 Action Items for Small Business Owners
The smart business owner’s recession management playbook calls for:
- Reducing discretionary expenditures (i.e. travel)
- Reducing or freezing hiring (layoffs could also occur)
- Reviewing vendors and bidding out to bring down costs
- Improving productivity and efficiency (training, process improvement, deployment of technology, outsourcing, etc.)
- Reducing real estate costs
Conclusion
Economic activity will likely return to pre-recession levels within three quarters from the recession's end (mid-2024). Expansion beyond that will likely return to long-run sustainable levels of annual growth of 1.5-2%. Demographic challenges will once again curtail growth outlooks as labor force growth remains subdued well into the future.
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