As the year winds down, so apparently does the economy. The Fed’s Weekly Economic Index has declined almost steadily since May of 2020, now at the lowest reading since then. NFIB’s Small Business Optimism Index took a dive in December 2020 and now stands at 92,1, well below the 49-year average of 98.3. Year to date, the monthly average is 92.8, with 3 months to go for 2022. Based on its history, this has been a year of recessionary readings.
Existing home sales and new housing starts have cratered (Census), important segments of the economy with links to many other sectors. More small businesses reported reducing employment (14%) than increasing it (10%) in NFIB’s September SBET survey and JOLTS reported a loss of 1 million job openings in August. Openings will decline before actual jobs are cut.
Meanwhile, inflation is showing few signs of slowing and continues to remain the number one problem for almost one-third of small businesses (30%). Oil prices have declined, but other costs, especially in services, have risen. And services are labor intensive, so these prices are especially sensitive to labor costs which show little inclination to decline. Union activity at small firms has picked up, making it harder for owners to manage wage costs.
President Biden’s continued release of oil from the Strategic Petroleum Reserve is an admission that current energy policies contributed to the rise in energy prices, kicking off our current inflation rout. Biden correctly argues that the releases will reduce oil and energy prices by increasing the global supply of oil for the next few months. However, this will not solve the longer-term shortage. High energy costs will continue to be a problem.
Owners continue to report raising worker’s compensation at historically record high frequencies, indicating that part of the economy is still on fire, and the blaze is not under control as higher wage costs are passed on in higher selling prices. NFIB’s Small Business Economic Trends most recent survey found that 45% of small business owners raised worker compensation while 23% planned to raise it. The survey hinted at some moderation, but one observation does not make a downward move a trend of declines.
Overall, firms are not positive about future growth, with 8 of the 10 Index components weak, some very weak. High job openings and strong plans to hire are the only components preventing a more serious plunge in the Index. If they fade in the coming months, the Index will confirm we are in recession territory.