Are we headed for a recession? This seemingly simple question has confounded economic observers so far in 2016.
Both sides in the debate have ample evidence to support their view. On one hand, we’ve seen record sell offs in the financial markets, seen by many as a sign that a turndown in the broader economy is all but inevitable. On the other hand, many economic fundamentals, such as monthly job creation, wage growth, and home purchases, have posted solid results in the last few months, suggesting we may have little to worry about.
So which side is right? According to the country’s small business owners — a group that’s perhaps unmatched in their ability to sense what’s really happening in the economy — the future isn’t all that bleak.
We learned this by surveying 7,673 small business owners across the country about their perceptions of the local and national economy between February 8 and February 19. We then compared these results to the answers we’ve received in our economic sentiment surveys dating back to December 2012 (data was collected quarterly until March of 2015 and has been collected monthly since then) and discovered that America’s small businesses remain cautiously optimistic that we aren’t headed for a recession.
Market Uncertainty Weighs on All Businesses
Because a recession is a backwards looking measure, we don’t know if we are in one for several months until after it has begun. The biggest signs of trouble so far in 2016 have come from the financial markets. The year began with the worst start ever for the S&P 500, falling 6% in the first week of 2016, and while it has recovered, the S&P is still 5.49% below its 2015 closing price and 9.49% below its all time high from May 21, 2015. Corporate bond yields have also had a historically bad start to the year. Put together, these indicators suggest the probability that the U.S. is in a recession is 50%.
Market-based indicators aren’t always right, though. Several indicators tell us we may still avoid a domestic slowdown in output – market selloffs without a subsequent recessions aren’t all that uncommon. Much of the drop-off in the financial markets seems to be tied to concerns about a potential dip in global aggregate demand, particularly from China.
So why exactly is a perceived global downturn affecting American markets? In essence, investors are worried that decreased demand from abroad may reduce exports, which could lower corporate profits for American multinationals and weaken business investment. Ultimately, this could have downstream effects that impact a broader part of the economy, not just the bottom lines of the biggest companies.
Reflecting this, real GDP grew only 1.0% in the fourth quarter of 2015, down from 2% in Q3. On the other hand, data from the Chicago Fed shows above-average growth in economic output in January, and economic fundamentals generally remain “favorable”.
Reasons for Optimism
The case for optimism lies in the American labor market. It’s arguably in its best condition since before the Great Recession of 2008-2009. The unemployment rate is at an 8-year low of 4.9%, payrolls have had annual increases of over 2% for 29 straight months, and average hourly earnings stand at $25.39, an all-time high water mark and the second-biggest one-month jump of the current expansion.
The real estate market is also in the midst of a robust expansion. Existing home sales in January were up 11% from a year ago, the largest gain since July 2013, property values are up 5.7% year-over-year, and there’s been over a million housing starts in each of the last 10 months. Low borrowing rates are helping this strong push in real estate, with mortgage rates remaining near record-lows (this comes despite the Federal Reserve raising its fed funds rate in December for the first time in 9.5 years, though it may not do so again soon with inflation remaining modest and ongoing uncertainty in the markets).
What about Small Business
So where do small businesses line up on this debate? Are they expecting a recession, an expansion, or something in between? The small business owners we heard from this month continue to hold mostly positive views about the economy’s future. While the less-than-ideal financial news of the past month has slightly tempered their expectations of what’s to come, the overall sentiment remains well above the levels from 2013 and 2014.
While many realize that the market slowdown could affect them, most remain hopeful that the effects will be limited. An accountant in Houston echoed a common sentiment: “We cater to a clientele that is being slightly more cautious, but are still doing much of their business as usual, at least from what we can tell.”
Of course, not all small businesses are affected in the same way by changes in the broader economy. On the positive side, those in home improvement industries are looking to capitalize on the persistent strength in the real estate market. As a carpet cleaner in Seattle put it, “The housing market has created a lot of work. As people move out, buy new homes, and remodel, demand for my business has increased.”
Conversely, those providing more income-elastic services, demand for which tends to drop as incomes go down, such as events professionals, have expressed more concerns about recent macro developments. A pastry chef in Hollywood, Florida put it this way, “Upcoming elections and the uncertainty of the nation’s economy are leading to more people holding off on large purchases and events.”
Variation exists not only between industries but across metropolitan areas – 14 of the 15 major metropolitan areas we examined expressed worsening feelings in their outlook on the economy this month (Atlanta being the exception). Despite this negative one-month trend, small businesses in these cities are still reporting optimism scores that are near the highest we have ever recorded.
Put simply, small businesses, like many economic observers, are carefully watching what’s happening in the financial markets and with their clients, but remain cautiously optimistic that we aren’t heading into a recession. While these business owners realize the uncertainty in the global economy could ultimately affect them, they simply don’t yet see it as a reason to change their economic outlook.
In this regard, small businesses are in agreement with some of their counterparts from corporate America. As a poll from Bloomberg Business reveals, CEOs whose companies are more domestically focused share this sense of cautious optimism, while those that are particularly exposed to events abroad are feeling more anxious.
Companies that are focused abroad are right to worry about the global economic outlook. But for the more optimistic domestically-focused companies, the outlook at home is what matters. Thumbtack’s small businesses have a unique, on the ground insight into how consumers are spending their disposable income, and by keeping an eye on what they are feeling about the future, we can gain unique insight into the outlook for the future. And for now, those expectations are more positive than negative.