Survey finds optimism among small businesses
The U.S. economy is in good shape in early 2024. Although inflation remains high, it has slowed significantly since peaking in 2022. The Federal Reserve aggressively raised short-term interest rates in 2022 and 2023 in an effort to slow inflation, but the economy has adjusted well, with real GDP growth in 2023 well above the long-run average.
Most importantly. the labor market is historically strong. Although the unemployment rate increased slightly in February, it has been below 4% for more than two straight years, the longest-such stretch since the late 1960s. Wage growth is strong and is now running ahead of inflation. This will support gains in consumer spending this year.
Another indication that the economy will continue to perform well in 2024 comes from the latest results from PNC’s semiannual survey of small and mid-sized businesses. When the results from the fall 2023 survey came out, they showed record-high small business optimism about near-term prospects. This was a puzzle at the time, given high inflation, high interest rates and a lot of talk in mid-2023 — including from PNC — about a potential recession.
As it turns out, the fall 2023 results were on to something, as economic growth actually picked up in the second half of last year.
The spring 2024 results are even stronger, representing the best in the 22-year history of the survey (see chart).
Seventy-nine percent of the small business owners surveyed were optimistic about their company’s prospects over the next six months, with another 20% moderately optimistic and only 2% pessimistic. The percentage of those that are optimistic is up from below 50% as recently as the fall of 2022 and from just 32% in the fall of 2020 when the economy was only beginning to recoverfrom the pandemic.
Other measures from the survey are also at or close to record highs. The share of small business owners who are optimistic about the national economy is now 55%, also a record high, and up a remarkable 40 percentage pointsfrom the spring of 2022.
Similarly, the share of small business owners who are optimistic about their local economy (63%) and the global economy (40%) are also at record highs for the survey.
There is a gap between the share of small business owners who are optimistic about their own company’s prospects (79%) and the national economy (55%) of 24 percentage points. While this gap is above the long-run average for the survey, it is down from 43 percentage points in the fall of 2023. Some of this large gap is likely due to distortions that remain from the pandemic, as well as the currentpolitical environment.
But the fall in the gap over the past six months and the record-high optimism about the national economy reflect an improved sense of optimism among business owners about the outlook in early 2024, with growth picking up in the second half of 2023 and inflation slowing.
The survey also has some good news on near-term inflation. Fifty-six percent of small business owners expect that the prices their suppliers charge will either decline or remain the same over the next six months, the first time this measure has been above 50% since 2017. Similarly, 51% of small business owners expect that the prices they charge their customers will either remain the same or fall. And for those small business owners who do plan on raising their prices, the increases are expected to be much smaller than at any time in the history of the survey.
One area where the results are mixed is employment.
Only one-fifth of respondents (21%) expect to increase their number of fulltime employees in the near term, lower than at any point from 2015 through 2019, right before the pandemic started. This is up sharply from just 9% in the fall 2023 survey. The improved optimism about the national economy is likely driving increased hiring expectations from the fall, but ongoing difficulties in finding qualified workers with the tight labor market remain a constraint.
Overall, the results from the fall 2024 small and midsized business owners survey are consistent with PNC’s near-term outlook.
The U.S. economy will continue to expand in the near term thanks in large part to continued strong consumer demand. Inflation, which has already slowed over the past couple of years, should continue to ease. With slowing inflation, the Federal Open Market Committee is set to cut its key policy interest rate later this year, which should provide additional support to economic growth. Job gains will remain solid but slow from the very strong pace of the past few years as the labor market continues to normalize following the pandemic.