Main Street is safer than Wall Street that a recession is coming

Main Street and Wall Street are often at a distance when it comes to the state of the economy. The likelihood of a recession hitting in 2022 is the latest example. Both fields are bearish, but small business owners are leading the way for negative sentiment, by a considerable margin.

Wall Street has been consumed by the Federal Reserve’s efforts to fight inflation it had distorted for too long and the risk of interest rate hikes leading to a recession. A CNBC poll earlier this week found that more than half of economists and investment professionals expect the feds to fail in its mission to design a “soft landing” for the economy. But the stock market heaved a sigh of relief on Wednesday, with shares rising later Fed President Jerome Powell said so that a more aggressive rate hike of 75 basis points is not being considered and that the central bank remains convinced that it can lower inflation without collapsing the economy.

On Main Street, central bank messages are not likely to cause so much relief in the short term. According to the latest, eight out of ten small business owners expect a recession to occur this year CNBC | SurveyMonkey Small Business Survey for the second quarter of 2022. Inflation remains the number one concern for small business owners surveyed by CNBC and their business outlook is negative. The survey finds that few small business owners see positive points in the current economy: only 6% rate the current state as excellent and 18% as good, while 31% rate it fair and 44% rate it poor.

While the survey’s small business confidence index rose for the first time in the Biden administration due to responses to the index’s key questions related to immigration policy and a 3 percentage point increase (to 36%) between Small business owners who have described their current trading conditions as good, remains close to its all-time lows and well below its pre-pandemic baseline.

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

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

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

Small business survey findings may be swayed by politics, with the conservative community skewing, but economic concerns are high among all small business owners. Those who identify as Republicans or lean on the GOP lead the bearish outlook, with 91% expecting a recession, but among those who are Democrats or leaning on the Democratic party, 66% still expect a recession.

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

In a parallel audience poll conducted for CNBC, a nearly identical 77% predict a recession will occur this year, again with Republicans more likely than Democrats to predict economic problems (87% versus 71%).

Inflation remains the main concern

38% of small business owners say inflation is their top concern, twice as high as “supply chain disruptions” in second place (19%) and well above Covid-19 (13%) and labor shortages (13%).

Most of the small business owners (75%) surveyed say they see an increase in the cost of supplies. But as much as they have to offset the cost increase by raising prices on their own, the CNBC survey finds that many are reluctant to pass on the price increases to consumers who are already hit hard by inflation.

The percentage of those who raise prices fell from 47% to 40% quarter over quarter. Only 17% say now is a good time for companies to raise prices in general, about half of the number (35%) saying now is a bad time to raise prices. Almost half (47%) have mixed views on whether or not to raise prices.

While this finding is in contrast to other recent small business surveys showing that rising prices are still a requirement for most small businesses given rising input costs, the CNBC data fits a business perspective. darker found in other recent Main Street data.

The National Federal of Independent Business monthly survey shows the outlook for economic conditions at the lowest level in its history, and that bearish view has increased dramatically. The percentage of small business owners expecting conditions to worsen over the next six months reached a net negative of 49% in March, the last month for which data is available, up from a net negative of 35% in the preceding month. In August, that reading was at a net negative of 28%.

“Inflationary pressures have continued and now seem more integrated and fundamental,” said Holly Wade, director of the NFIB Research Center. “It’s really a concern about the ability to run a business in the future, and it’s incredibly stressful to find ways to balance the absorption of price increases from inputs and the level to which those price increases are passed on. … Something it has changed to break and it will likely be a recession, “he said.

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“They can only do so much,” said Eric Groves, co-founder and CEO of the online small business platform Alignable. “They’re already inhibited from getting all the inventory they want and the only way out is to bring back customers and increase revenue, and they’re struggling to figure it out.”

His company’s research into anticipating small business sales at pre-pandemic levels continues to shift over time. Since late 2021, each month of its data has shown a shift in outlook as Main Street plans to return to full recovery. Earlier this year, the expectation was the first quarter of 2023 and now it’s the fourth quarter of 2023.

“Clients aren’t coming back as fast as they thought and inflation is squeezing margins. And with all that’s going on, it’s no surprise that the sentiment is that a recession is coming,” said Groves. “The ability to shift prices to customers isn’t as strong as it is for a large business.”

The challenge for many on Main Street has been being able to access the inventory they need to sell at a competitive rate, which remains much lower than that of a large retailer. “They aren’t getting their fair share of the widget,” she said.

The percentage of small businesses claiming to have returned to at least 90% of pre-pandemic revenue, which had been a sign of health, is falling again, according to Alignable, from 40% to 27% in its most recent data, as they attempt to compete with a much better economy of scale.

Timing a recession call

Even the best market experts have a weak track record of calling a recession, at least the exact timing, and there’s no reason to expect small business owners to be better at spotting this economic turnaround. But such a negative view on the economy from a large component of it is significant.

This didn’t show up in the first quarter corporate investment data, which was solid, but a recent slowdown in staple durable goods shipments over the past two months suggests a slowdown in the pace of corporate investment in the second quarter, according to Kathy Bostjancic, head of United States economist at Oxford Economics. “However, it is too early to say that we are seeing a tipping point and a lasting slowdown in investment,” she said.

Consumer sentiment is down sharply, according to the University of Michigan, but consumers continue to spend at a healthy pace and the Conference Board’s measure is higher, reflecting the focus of the consumer survey on the job market. that stays warm.

Right now, with inventory levels so low, largely due to supply chain disruptions, businesses must continue to invest to rebuild inventory levels, as well as invest in technology to increase productivity, especially with the cost of work so high. Business owners may hire fewer and do more work on their own, but recruiting and retaining staff right now is likely key to increasing sales.

These supply chain and labor market requirements are adding to the stress level on Main Street and ultimately “can have a real economic impact,” said Bostjancic. “Entrepreneurs’ confidence levels can also have a direct impact on their investment decisions and hiring.”

“They don’t see how the current environment is sustainable,” Wade said. “Consumer spending is strong and GDP is strong, but the stress they feel in trying to absorb these costs and fill positions and keep increasing compensation for retention and recruitment is all incredibly stressful,” he said.

Robert Fry, an economist who is among the respondents to CNBC’s Fed Survey, remains of the opinion that a recession will not strike until the end of 2023, and quoted the words of Rudi Dornbusch, a famous MIT economics professor who taught central bankers: “A crisis takes a lot longer than you think, and then it happens much faster than you thought.”

See the current environment even more grounded in negative sentiment than in actual negative data. “Three variables drive sentiment. The unemployment rate, the stock market and the price of gasoline. And it’s not a weighted average. People only take one at a time, and right now it’s gasoline prices.”

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

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

Inflation that puts pressure on margins, pushing back earnings goals and shifting the timeline towards full recovery puts everything at risk for small business owners. “It’s going to be more of a grind,” Groves said, and to an entrepreneur who might feel like a recession, regardless of formal economic research. “I don’t know what it means to go into recession with respect to the operating margins of my business being questioned and how much I have to spend on things. … and I have a degree in Economics,” he said. “Shut your head and do whatever it takes to survive, and do more with less, and you see them working more hours. Owners have to find a way to get through it.”

Join us today for CNBC’s virtual Small Business Playbook event where business leaders and experts will lecture on a variety of topics affecting Main Street, from managing inflation and labor shortages to new ways to secure funding.