Economic trends are both troubling and encouraging

The U.S. and local economies are in a state of flux. On the positive side, the labor market remains historically strong with solid job growth. The national, Pennsylvania, and Pittsburgh area unemployment rates are near decadeslong lows. Consumer spending continues to increase, and there are indications that inflation, although still high, is starting to slow.

But other signs are more worrisome. Interest rates are much higher than they were a year ago as the Federal Reserve has tightened monetary policy to cool off economic growth hoping that this will reduce inflation. As a result, there have been contractions in interestrate sensitive industries, most notably housing, with housing starts and home sales declining and house prices starting to fall.

Most recently, there has been a focus on weaknesses at certain banks, with the FDIC stepping in quickly to shore up confidence. Broadly speaking, the banking system as a whole still appears to be very solid, with good credit quality and lots of high-quality assets relative to deposits. But recent bank failures highlight the increased stress in the financial system resulting from higher interest rates.

These trends are reflected in the Spring 2023 national and Pennsylvania results from PNC’s Economic Outlook survey of small and midsized business owners. On the positive side, with continued strong demand, particularly from consumers, small business owners are very optimistic about the outlook for their own businesses in the near term: 60% of the business owners surveyed are highly optimistic about their prospects over the next six months, with another 40% moderately optimistic. Only about 1% of the business owners surveyed are pessimistic about their own company’s near-term prospects (total does not equal 100% because of rounding). This is the highest optimism we have seen in the more than20-year history of the survey.

A number of factors are behind this strong small business optimism. Small business owners expect to increase sales over the next six months as demand remains strong. With that strong demand, they report success in raising prices to their consumers. And compared to the past year, they report that they are raising prices because strong demand allows it, rather than passing along their own higher-costs.

At the same time, business owners report that although wages paid to their employees continue to rise, they are growing at a slower pace. Given these trends, 58% of small businesses expect their profits to increase over the next six months, while only 2% expect their profits to decline; these are among the strongest results in the history of the survey.

But while owners are optimistic about the near-term outlook for their own businesses, they are less optimistic about national and local economic conditions.

Only about one-quarter (26%) of

small and mid-sized business owners report that they are highly optimistic about the U.S. economy over the next six months, while 57% are mildly optimistic and 18% are pessimistic. These numbers have improved somewhat over the past year but are lower than they were from 2017 to 2021, excluding 2020 when the pandemic was a huge drag on economic optimism.

Historically, business owners have been more optimistic about their own company’s prospects than about the national economy but this divergence is particularly wide in Spring 2023. It could be that media discussion of a potential recession has made business owners nervous, even as their own firms continue to do well.

Business owners are slightly more optimistic about their local economies than they are about the national economy.

Local business owners are somewhat less optimistic than their national counterparts. Only 54% of Pennsylvania survey respondents in Spring 2023 were highly optimistic about the prospects for their own business over the next six months, compared to 60% nationally. Similarly, just 17% of Pennsylvania business owners were highly optimistic about the U.S. economy in the near term, lower than the 26% nationally.

This is not surprising given that the recovery from the 2020 recession has been weaker in Pennsylvania and in the Pittsburgh metropolitan area than in the rest of the U.S.

Employment nationally is almost 2% above its prepandemic level, while state employment is still slightly below where it stood in February 2020 right before the pandemic, and employment in the Pittsburgh area is about 3% lower. Weak population and labor force growth, and an older population, are holding back state and local businesses relative to their national counterparts.

These trends are expected to persist into the future, with long-run economic growth in Pittsburgh and Pennsylvania expected to lag that of the U.S.