An in-depth examination of the many factors driving the thriving Small Business Economy
2020 Small Business Economic Outlook
On the heels of a strong holiday season, small business owners should be feeling quite optimistic as we roll into 2020. The American economy was gifted with reduced economic uncertainty, capping off what has been – while not spectacular – a very solid year of economic growth.
At this point last year, and throughout the majority of this year, most economic analysts out there were predicting a recession of the US economy. No one could believe that the current economic expansion could possibly continue into a record 11th year.
We weren’t one of them! We wrote about our predictions for 2019 last year at this time – all of which came true for the reasons we outlined.
We had predicted that thanks to the hardy and robust American consumer, the US economy would continue to chug along, even as the rest of the world’s economies stagnated and overall manufacturing investment decreased.
Furthermore, we also predicted that the combination of negative interest rates from many central banks around the world along with the surge issuance of US corporate debt would continue to support the dollar’s strength relative to other currencies, which it did. Global money flocked to the greenback in the search of the higher yields available in US, plus for the relative safety of the dollar as a store of value in uncertain economic times.
The reversal of the aforementioned trends associated with these concepts lays the foundation for our first call of 2020 – the dollar will weaken in value relative to most of the world’s major currencies.
Catalysts for our prediction include the recent announcement of a phase-one trade deal between Washington and Beijing, the reduction in uncertainty surrounding Brexit, and better than expected economic numbers coming out of China heading into 2020.
The culmination of these factors will make many riskier international investments, offering a much higher yield than comparative US investments, attractive to global investors.
Remember, when investors sell US investments in favor of international ones, they must convert (sell) dollars to the local currency of the new investment, pushing downward pressure on the dollar and upward pressure of the local currency their new investment is in.
Normally the decline in value of the dollar would be a detriment to the majority of American businesses that import some portion of their inputs. Fortunately; however, the rollback of tariffs against China, our largest trading partner, will mitigate the impact of the decline in the purchasing power of the dollar relative to other currencies.
For business owners importing supplies or materials, it would advantageous to purchase these inputs in the beginning of the year while the dollar is still strong before it begins its expected decline in value.
Conversely, business relying on foreign sales or international customers (I.e. tourism industry) should really start to benefit the decline in dollar as we approach summer, particularly if the Eurozone economy continues to show signs of the turning the corner by the time we reach the second quarter of this year.
The most important economic driver in 2019 in the US was the service sector, driven by consumer consumption. We are predicting this to continue through 2020. Fueling this consumer consumption is an unemployment rate sitting at a 50 year low of 3.5%, along with the continued increase in wages workers are receiving.
As of November 2019, year-over-year wage gains are sitting just south of 4%. More encouraging though is the trend showing larger percentage wage gains going to the lowest paid workers in society, with almost all minority segments posting wage changes gains that exceed the national average in the fourth quarter of 2019.
According to data from the Federal Reserve Bank of Atlanta, pay for the bottom 25% of workers (in terms of annual income) increased 4.5% November of 2019 compared to 2.9% for the top 25% of workers. Furthermore, the Atlanta Fed noted that wages for low-paid workers has been accelerating since 2018, matching the pace for high-skilled workers for in November for the first time since 2010.
Equipped with these higher wages, consumers have been increasing their spending, as opposed to saving more, and look poised to continue this spending spree. Throughout 2019, the household savings rate – the percentage of household income being put into savings – actually declined from a high of 8.8% in February to 7.8% in October (the most recent month available at the time of this writing).
In other words – give the American consumers some money, and they’ll spend it! Particularly when the public sentiment for the 12-month outlook of economy improves, as it did steadily throughout the latter part of 2019. Illustrating this is data from the Michigan Consumer Sentiment Index, the most widely watched barometer of how American consumers view the outlook for the economy. Since bottoming out in August with a rating of 89.8, sentiment has been climbing, reaching a score of 99.3 as of the Dec 2019 rating. To put these into context, the long-term average for these ratings is only 86.66!
While positive overall, the wage gains coupled with a tight labor market does present challenges to small business owners with regards to finding qualified talent that they can afford to hire.
This difficulty in finding workers will he felt more acutely in the steadily improving home construction industry. There is plentiful demand for new starter home construction, particularly in the red-hot metro areas across the south such as Phoenix, Austin, Atlanta, and Tampa.
On the bright side; however, there is unanimous consensus that Federal Reserve Chairman Jerome Powell will not being raising interest rates anytime soon. As of the new year, the 30-year fixed home mortgage is sitting at 3.72%, down from 4.51% at the same time last year. All signs point to monetary policy continuing to be accommodative to the housing market for the foreseeable future, which is why we’re predicting a strong year for the industry as a whole.
Furthermore, home sales notched gains finally started notched consecutive monthly gains in September and October – signs the effects of the 2019 cuts by the Federal Reserve to interest rates are finally start to matriculate through the market – leaving the housing market primed for a busy spring construction and selling season.
Overall, we are expecting a strong economic year for American small businesses. While there a few items with the potential to alter this narrative, we believe the trends we outlined will foster another strong economic year for America’s small businesses community.American Corporations / business finances / business leaders / Consumer Spending / funding source / growth
- 2020 Small Business Economic Outlook
- New EU Tariffs the Trump Administration is Set to Impose
- Relax, Relate, Release: Stress Awareness Month
- Laugh at Work Week
- Inclusion: Going Beyond Diversity
SMALL BUSINESS ECONOMIC OUTLOOK FOR 2020