The U.S. economy, nearly halfway through 2022, continues to challenge small businesses. Inflation hit its worst level since 1981 and stock markets plunged straight into a bear market. Mortgage applications are at their lowest level in 20 years, housing prices are still 20% on the year and mortgage rates are rising. Energy costs are skyrocketing and food inflation is in double digits. After keeping interest rates too low for too long and adding $6 trillion to its bond portfolio, the Federal Reserve finally decided to fight inflation.
Small business owners would agree, it’s time to fight back, but why has it taken so long? The answer is revealed by examining the mission of the Federal Reserve: stable prices and full employment. Total employment is still about a million workers down from its February 2020 peak. The administration has been focused on pumping big bucks into the economy, sending checks to millions of consumers, the granting of free loans to millions of businesses and the granting of generous unemployment benefits. Additionally, there were moratoriums on student loans and rent payments, both of which helped support an overheated economy. The Fed kept interest rates historically low, so loans were cheap and, according to the NFIB’s monthly surveys, credit was the “easiest” it had been in 48 years. Only one or two percent said they didn’t get all the credit they wanted.
Thus, millions of former workers who produced nothing had millions of dollars to spend. There were not enough “products” available to meet demand, so prices began to rise rapidly. Business owners complained that stocks were too low at 48-year highs. Supply chains have been broken, hampered by Covid-related disruptions and labor shortages. Wages rose to attract workers. Employment eventually rose and double-digit unemployment rates disappeared, but employment remained at the center of policy. The administration dismissed inflation as temporary and kept its foot on the pedal, low interest rates and more government spending.
Inflation has become the #1 issue for small business owners (28%) displacing the lack of skilled workers (23%) now in second place with taxes and regulations following. Only 1% cited credit issues as their top problem, thanks to the Fed. Wage costs rise as homeowners fight over labor shortages and energy costs skyrocket (average gas cost $5). Oil prices are above $120 a barrel, and that’s affecting many commodities beyond fuel. Natural gas prices are also very high, which affects essential products such as fertilizers. Owners reporting lower incomes outnumber those reporting earnings greater than 2-to-1. That isn’t expected to change anytime soon as administration policies reduce the amount of oil produced by corporate America. The administration is turning to Venezuela and Saudi Arabia, asking them to produce more oil to lower world prices rather than encouraging US production through policy changes.
The prospects for improvement are not good. Even if prices stopped rising today, they are still at double-digit levels above last year. Will the prices go down? Will wages be reduced? Otherwise, we’re stuck at current levels as the new normal. Small business owners expect tough times. Wage costs are generally reduced by job cuts, not by actual wage cuts. Fifty-nine percent expect business conditions to deteriorate by the end of the year, only 6% see better. The consumer sentiment index hit an all-time low in June, 50.2 (University of Michigan). The president said the best way to prepare for hurricane season is to get vaccinated against the virus. The storm is coming, I hope the administration has the appropriate vaccines. So much for politics. The Fed plans to fight inflation by raising interest rates and cutting spending (housing will be the hardest hit). With all the economic challenges ahead, it looks like the second half of the year will be tough.