Inflation and recession risks are top concerns for US companies across multiple sectors. These concerns are starting to weigh on operations across the board, leading to a slowdown in business activity and falling sentiment, according to many indicators.
The National Federation of Independent Business (NFIB) Optimism Index highlights that 37% of small business owners reported inflation as the most important issue in July, the highest since 1979 . Average selling prices and the net percentage of owners expecting actual sales to be higher deteriorated.
NFIB chief economist Bill Dunkelberg said in a statement: “Uncertainty in the small business sector has risen again as owners continue to grapple with historic inflation, labor shortages and supply chain disruptions. “As we enter the second half of 2022, the owners will continue to manage the business into a highly uncertain future.”
This was in line with August’s IBD/TIPP economic optimism index, which fell to an 11-year low of 38.1 as inflation wiped out wage gains and consumers remained pessimistic about the economy. This could mean bad news for the business environment.
Meanwhile, the third quarter CNBC/SurveyMonkey Small Business Survey found that 77% of small business owners expect inflation to continue, and 57% believe the recession has already begun. rice field.
In this economy, it’s all about planning for the worst and hoping for the best. Mike Davis, Founding Partner of Olive Tree Ridge, a multi-strategy asset management firm, said:
“If you plan for the worst, you’re going to have the best days ahead, because you’ll be pleasantly surprised,” Davis told the Epoch Times. , businesses still need to navigate information, storm clouds and evolving consumer trends.
The Federal Reserve does not share the pessimism of the private sector, arguing that the agency has the potential to keep inflation under control and achieve a soft landing for the US economy.At the same time, Fed Chairman Jerome Powell is ostensibly discouraged, as he warned in a recent Jackson Hole Economic Symposium that there would be “some pain” in the economy.
“Higher interest rates, slower growth and a softer labor market will lower inflation, but will also cause some pain for households and businesses,” he said in a prepared remark. An unfortunate price, but failure to restore price stability would mean far greater pain.”
Is this pain that Powell referred to already being felt in the private sector?
private sector health
According to the Census Bureau, industrial production fell to 3.9% year-on-year in July from 4% in June. Manufacturing output also fell to 3.2% on an annualized basis from 3.6% the previous month.
The broad Purchasing Managers Index (PMI), which indicates the general direction of the economic sector, is weakening.
S&P Global’s US manufacturing PMI fell to 51.3 in August. This is his lowest factory growth rate in two years. Anything over 50 indicates expansion. Production fell amid weak demand, labor shortages and raw material shortages. A similar trend was evident in his other S&P Global PMI index. Composite PMI fell to 45.0, while services PMI fell to 44.1.
Economists said rising interest rates and higher inflation had weakened customer demand. So the company’s output charges have risen to his lowest level in 17 months to bolster new sales.
“The preliminary PMI data for August showed further disturbing signs of the health of the U.S. private sector,” Sian Jones, senior economist at S&P Global Market Intelligence, said in a report. Demand conditions slowed again, caused by strong inflationary pressure on spending on homes, which weighed on activity.As new orders for services return to contraction territory, clouds gather across the private sector, It reflects a subdued demand situation where
In July, Chris Williamson, chief business economist at S&P Global Markit Intelligence, said in a comprehensive analysis of the state of the global manufacturing industry that U.S. business confidence remained “worrisomely subdued. There is up to, ”he pointed out.
“The U.S. economy is contracting at a rate not seen since the 2009 global financial crisis, as the flash #PMI, which covers manufacturing and services output, fell sharply in July (first pandemic lockdown),” he said. twitter.
However, the Institute for Supply Management (ISM) manufacturing and non-manufacturing PMI prints were mixed.
The manufacturing PMI in July eased better than expected to 52.8, while the non-manufacturing PMI rose to 56.7. Both indicators highlight higher employment levels, easing price pressures and lower new orders.
Anthony Nieves, president of the Institute for Supply Management, said in a statement: “Overland trucking, restricted labor pools, various shortages and inflation-driven availability issues continue to hamper the services sector. increase.
Still, the private sector PMI remains at pandemic levels.
In addition, federal bank data for various regions has been disappointing for the domestic economy.
The Richmond Fed’s manufacturing and services indexes fell to -8 and -12 respectively in August. The NY Empire State Manufacturing Index plummeted to -31.3 as the business environment, new orders and capital spending weakened. However, while the Philadelphia Fed’s manufacturing index improved to 6.2 in August, the Philadelphia Fed’s Business Situation Index fell to -10.6.
The Dallas Fed manufacturing and services indexes plummeted to -22.6 and -10.9 respectively. A survey of the Dallas Federal Reserve has begun to see activity subside, she said, one of respondents in the machine manufacturing industry.
“We are starting to see weakness in orders,” the person told the regional central bank. “We are gearing up for further slowdowns, but hope for the best.”
Labor productivity has become a critical issue for the private economy this year. Non-farm labor productivity fell 7.4% in the first quarter and 4.6% in the second quarter, according to the Bureau of Labor Statistics (BLS). This was due to unit labor costs rising by 12.7% and 10.8% and working hours rising by 2.6% and 5.3%.
CNBC host Kelly Evans said, “This not only reversed the temporary productivity spike we saw early in the pandemic. At the time, the economy was suffering from a massive loss of workers. Despite this, I was desperately trying to maintain it,” he said.
What will happen in 2023?
A second-quarter survey from the CNBC CFO Council found that 68% of CFOs expect a recession in the first half of 2023. No one expects the U.S. economy to avoid facing a recession as inflation remains the main external threat to corporate business.
It will be interesting to see how companies respond to economic conditions, Davis said. He believes businesses tend to have short-term memories, which can make them desensitized to the pain of rising gas prices and labor costs.
As a result, private companies may look to spend a little more if their balance sheets have room and cost pressures ease.
Ultimately, it will come down to business owners making more informed decisions by reading beyond headlines, he added.
“You have to read the article, double-click, triple-click and form your own opinion,” Davis said.