Updated: Dec 27, 2022
If you’re watching the news, you hear economic alarm messages like…
“interest rates are rising”
“inflation is out of control”
“unemployment is too low”
“get ready for a recession”
As a business owner, it’s important to understand economic news without succumbing to worry. Sadly, most small business owners worry and then make business decisions based on the emotions caused by that worry.
Business success is predicated on making your best decisions in a timely manner. These best decisions happen because you understand the mechanics of your business; and you have the clarity to act. When it comes to “news”, reporters exaggerate the negative. This blog post will highlight a few features of the current economic climate to help you better understand our current economic situation so that you can make your best business decisions with clarity. I hope you can see that opportunity is everywhere for your business!
Important Economic Indicators
Let’s first cover the numbers that you will hear in the news repeatedly. These numbers are called “economic indicators”. Here they are:
The Fed Rate
There are many more economic terms that cause worry. However, this post is limited to the factors that affect your business.
Unemployment is the percentages of people who want jobs who are not finding jobs.
When the unemployment rate drops below 5%, it is thought that most people who want jobs are working. This means that if you want to find quality workers, they are employed by another employer. This competitive labor market means that you'll pay top dollar for the workers that you require for your business to lure those workers from your competition.
In very simple terms, inflation is the percentage of increase in prices of goods and services. Inflation is also called the Consumer Price Index or CPI. Inflation affects your business in several ways. The two most pronounced ways inflation is factor for your business is: 1) the cost of labor; and 2) your prices.
The cost of your labor will increase as your employees need higher income to pay for basic needs. This increase hits lower income workers harder because they often don’t have a fixed house payment and will pay ever increasing rent prices. Be sensitive to your workforce and how price increases are affecting their cost of living.
Your prices must increase at least at the rate of inflation. This price increase will have an impact on your customers as well. More price sensitive customers will decide to either forgo making purchases from you; buy less from you; or find a substitute for your services. If you can find ways to create lower cost services that cost you less to perform, it’s a win for both you and your customer.
Inflation is not always an economic negative. In the energy industry, increases in energy prices increase opportunities to save energy and generate energy. The industries that benefit from increases in energy prices include utility companies, energy service companies (ESCo’s), and oil companies.
This chart of electricity price increases illustrates how the price of energy is highly volatile and ever increasing. As you can see in our recent numbers of energy increases are double the rate of the CPI for other goods and services. If energy prices remain high, they create higher prices in every other category.
The Fed Rate
In simple terms, the Fed Rate is the interest rate that banks are charged for money. The Federal Reserve uses this interest rate to attempt to control the economy. The two factors in the economy the Federal Reserve are attempting to control are rate of unemployment and the inflation rate. The Federal Reserve wants an inflation rate of 2%; and an unemployment rate below 5%. Because this is a controlling mechanism, many business professionals see the Fed Rate as a leading indicator of the economy. You may notice that each time the Federal Reserve chairmen gets in front of a TV camera, the stock market reacts. As a business owner, you should also react.
Like it or not, we have a manipulated economy. This economy is manipulated by the Federal Reserve. When the Federal Reserve increases interest rates, they are trying to slow down the economy; and hence slow down your business. They understand how a tight labor market and high interest rates affect your business. That’s why they’re doing what they’re doing.
Gross Domestic Product or GDP is the total amount of money transactions in United States. A recession is defined as a decline in the GDP for two consecutive quarters.
You can see by the chart above that a recession happened from 2008 to 2009; and briefly in 2020 during the pandemic. While “recession” is a scary word, it is meaningless to small business owners. Some industries do well in recessionary economies while others do poorly. Small business owners should see a recession as an opportunity. Assets become less expensive meaning that you have buying opportunities. Unemployment rates rise which means that high quality workers are available at a lower price. The Fed Rates drop which means that borrowing costs are low.
Government spending shifts our economy from private sector to the public sector. For private sector businesses this means that buyers will either be government entities, or they will supply products and services to the government.
The government debt increases each year. This means that the government is spending more than it is earning in tax revenue. You may notice that spending increases at a greater rate in recessionary periods. If your business serves the government, or government contractors this is a direct impact on your business. However, it is also important to understand that excessive government spending will increase inflation, drive down unemployment, and alter economic patterns. In 2008 government spending increased. If you owned a general contractor business, it would have been prudent to shift from residential construction to commercial construction for government projects.
It’s important to understand our economy moves in cycles. The only unknown is how long each phase of a cycle will last. If inflation is persistent, the Fed Rate will increase causing stress for businesses and eventually higher unemployment rates. High unemployment and deflation will cause the Fed Rate to lower which will lead to increased borrowing and spending.
What Can You Do?
Each industry reacts differently to inflation and unemployment. A tight labor market (low unemployment) helps recruiters, and temporary labor companies. High inflation creates booms in asset purchasing markets like real estate. High energy prices create booms in energy industries. Higher interest rates stifle real estate markets, and industries who rely on cheap debt.
As a business owner, you must understand how the economy affects YOUR business.
Here are a few examples:
Energy Service Companies (ESCO’s): ESCO’s do well when energy prices increase. ESCo’s rely on low interest rates to finance projects that have a longer return on investment. In our current environment with higher interest rates and higher energy prices, the business impact is neutral. Energy prices tend to drop as the economy slows. However, recessions tend to force building owners to hold onto their current buildings instead of building new ones. Retrofitting buildings to improve efficiency and increase building life is a great opportunity for the ESCo marketplace.
Restaurants: Food prices are increasing at a higher rate than the CPI. Ironically, menu prices in restaurants are not increasing at the same rate as food prices. The CPI for groceries is at 12% while the CPI for restaurant menu items is 8.5%. Restaurants are either getting better prices for their food, or they are artificially keeping prices low and losing money in the process. The labor market in restaurants is very tight meaning they either cannot find employees or must pay higher wages. Based on theses two factors, it may be a good idea to create bonus systems for employees based on the length of time they remain with you; and increase menu prices to keep pace with grocery prices. It may also be a great time to move delivery services in-house instead of using Door Dash or Grub Hub as recessionary pressures in 2023 increase unemployment rates.
Construction: Higher interest rates are stifling house prices in the residential markets. Recessionary pressures are pushing many lower wage earners into government subsidized housing. The three opportunities that exist in real estate and construction are government housing projects, purchasing of real estate later in 2023 or early 2024, and renovation projects for existing homes. Immigration from Spanish speaking nations has accelerated in 2022 and 2023 which will favor contractors who learn to speak Spanish. This dramatic increase in immigration is an opportunity to hire and train immigrants for skills positions in the construction industry.
These are a few examples of how your industry is directly impacted by the economic indicators and cycles.
Remember, that economic cycles create OPPORTUNITIES for your business. It’s not all gloom and doom Look for the opportunities and you’ll find them. Don’t complain about government spending, inflation, or a tight labor market. It is what it is. Successful business owners seek out opportunities and don’t complain or worry about what they cannot control.
If you'd like to better understand the opportunities in your business that are being created by our current economic conditions, I’d love to help.
About me. I have been actively engaged in the energy efficiency, renewable energy, and energy conservation industry all my professional career from 1987 until now. I was a licensed Professional Engineering in six states and a Certified Energy Manager (CEM). I worked as a sales executive, energy engineer, sales manager, and entrepreneur. I started, grew, and sold my own Energy Service Company (ESCo) called Ennovate Corporation (1997 to 2013). I am now a certified professional business coach for business owners, engineers, and business development executives.