What Small Businesses Need to Know
By: Danielle Fallon-O'Leary, US Chamber
The U.S. economy has shrunk for two quarters in a row, according to recent data by the Bureau of Economic Analysis. The advance estimate shows that real gross domestic product (GDP) decreased by an annual rate of 0.9% in Q2 2022, following a decrease of 1.6% in Q1 2022.
With two straight quarters of economic decline, small business owners may worry about whether the U.S. is experiencing (or headed toward) a recession. While we cannot yet say with certainty whether our nation is facing a recession, small business owners will still want to monitor economic activity and prepare for the worst-case scenario.
What defines a recession?According to Curtis Dubay, Chief Economist at the U.S. Chamber of Commerce, whether we are in a recession “is a more difficult question to answer than usual.”
The typical definition of a recession is two consecutive quarters of the economy shrinking. However, decreasing GDP isn’t the only determining factor.
“Other key economic data matter, too [...] like income, job growth, consumer spending, and manufacturing output,” Dubay explained. “In normal times, if the economy is contracting, all these important economic indicators are falling too. However, we are not in normal economic times, so the typical pattern may not hold.”
Dubay noted that many of these additional economic indicators are holding steady, despite falling GDP:
“It would be difficult to call a period where this continues a recession, even if the economy meets the technical definition of one,” he added.
Reading the signs of recessionEven if we can’t conclusively say the economy is in a true recession right now, a second straight quarter of declining GDP may signal a slowdown in economic momentum. Q1 2022’s supply chain issues, along with trade imbalances and decreases in inventories, began the trend. As Q3 2022 gets underway, ongoing inflation and spiking Federal Reserve interest rates could push the economy closer to a true recession.
Dubay added that regardless of whether a recession occurs, consumers and businesses are still feeling the impact of an uncertain economy — and many are taking action accordingly.
“Consumer sentiment about the economy … is lower than even during the first few months of COVID in mid-2020,” he said. “Similarly, business confidence is down sharply, and businesses are cutting back on investment.”
How to prepare for a potential recessionAs risks of an economic downturn increase, small businesses should prepare accordingly. Here are some tips to recession-proof your business and withstand any economy:
While small businesses would be wise to recession-proof their operations, they can also plan ahead for brighter days, said Dubay.
“Inflation will come down and conditions will feel more like normal, probably within a few years. At that point, the economy is poised to grow strongly,” Dubay explained. “It would be helpful to be ready to enjoy that coming boom period, so as not to miss out on it at the beginning.”
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