Thoughts From The Divide – Small Business Frogs
If frogs are the classic example of an indicator species, i.e. they are “a go to for scientists wanting to find out more about the environmental health of a particular ecosystem”, small businesses may be our “frogs”. Indeed, this week as we saw a whirlwind of crypto headlines, price data, and employment news, we can use the latest small business surveys “as a proxy to diagnose the health” of our economic ecosystem.
“Will they fall or just stop rising as fast?”
This week, inflation was front and center as the latest CPI data showed easing price pressures. There continue to be pockets of strength, with OER continuing on its tear higher (up 0.8% MoM, “the largest monthly increase in that category since August 1990”), while used car prices were a particular (and much talked about) pocket of price weakness. (There were also some “periodic adjustments” worth noticing). The weak CPI number was particularly notable, thanks in part to the concurrent market moves, whereby stocks “surged” and bond markets significantly repriced the outlook for Fed hikes. (As an aside, Fed speakers were running the gauntlet, saying that “policy will need to become more restrictive” but tempering this by saying they could support a more gradual or measured approach). All that being said, let’s look at our economic frogs. In the latest ISM Services price index continues on a 65-month streak of higher prices but “indicate movement toward equilibrium, with a fourth consecutive reading near or below 70 percent, following nine straight months of readings above 80 percent”. Meanwhile, The ISM Manufacturing survey saw “decreasing prices for the first time since May 2020”. Switching to the NFIB’s Small Business Optimism Index, both actual and planned prices are well off their high. Yet this doesn’t preclude prices from causing pain: inflation was the single most important problem for 33% of owners, “three points higher than September’s reading and four points lower than July’s highest reading since the fourth quarter of 1979”. In his comments accompanying the report, Bill Dunkelberg wrote at length on inflation, pondering the path of prices and concluding that if the Fed can slow spending, “success for the Fed is bad news for small businesses, sales will fall, costs will be sticky, so profits will take a hit. Rough times ahead”.
“Owners continue to show a dismal view… but are still looking to hire”
Assuming that inflation has indeed peaked and is headed back to the Fed’s target (yes, there’s that saying about what happens when you assume…), then the other half of the Fed’s mandate moves to center stage. As we noted last week, the Fed may be, metaphorically speaking, late to the labor market weakness party. With the passage of another week, we’ve seen a deluge of additional anecdata, with Elon taking a hatchet to the Twitter payroll, Redfin announcing substantial job cuts, and Meta moving from a hiring freeze to outright layoffs. While these tech layoffs may be making headlines, our frogs aren’t seeing quite the same amount of pain. Indeed, NFIB’s Dunkelberg noted a contradictory dynamic in his comments, saying, “Owners continue to show a dismal view about future sales growth and business conditions but are still looking to hire new workers”. The ISM readings, however, were slightly more pessimistic. In Services, “due to uncertainty regarding economic conditions, some companies are holding off on backfilling open positions”. At the same time, Manufacturing noted, “companies are continuing to manage headcounts through hiring freezes and attrition to lower levels, with medium- and long-term demand still uncertain”.
P.S. The frogs are starting to feel credit tightening, with the latest NFIB responses on credit echoing the latest SLOOS report showing “tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the third quarter”.