Is the economy better than it seems?
Interest rates are high. Banks are collapsing. Inflation is taking a bite. Businesses can’t find workers. Others still can’t find products. Small business optimism is low. Our national debt is exploding. A fungus has killed 99 percent of the world’s population. Wait…sorry, that’s just a TV show.
The media love to report on doom and gloom. Meanwhile, and despite all the bad economic news we hear, I’ve got some good news: Things aren’t as bad as they seem.
I talk to small and mid-sized businesses every day all around the country, and although there’s lots of grumbling, no one’s denying that they’re still making profits. They’re concerned about all the bad economic news they hear. But it’s not all that bad. Here are a few reasons why.
Energy costs are declining
According to Gasbuddy.com, gas prices nationally are now at $3.40 per gallon, a 20 percent decrease from a year ago. Oil is now at $66 a barrel, a 37 percent decline from a year ago. Yes, that’s higher than two years ago, but it’s heading in the right direction.
Rental vacancy rates are at 30-year lows
The Wall Street Journal is warning of a potential real estate debt problem as many loans are coming due for commercial properties that remain unoccupied because of all those people now working remotely. Rental vacancy rates for consumers are at a 30-year low, and according to the National Association of Realtors, office vacancies have risen just 3 percent since 2019, which, while not great, certainly isn’t a disaster. Is this a problem? Maybe. Will this turn into a banking calamity? I don’t think so.
Commercial loans continue to rise
You would think with the average bank prime rate increasing from 3.25 percent to 7.75 percent in just a year that the activity of commercial and industrial loans to finance business properties and equipment would taper down. But that hasn’t happened. In fact, loans have increased almost 14 percent during that period. Yes, that level has plateaued over the past month, but businesses so far haven’t been put off from financing their projects even with much higher costs of capital.
Retail sales are at an all-time high
Meanwhile, and God bless them, consumers keep spending. U.S. retail sales in February 2023 were 4 percent higher than a year ago. Food and beverage store sales were 5.5 percent higher than a year ago. The National Restaurant Association says that the food service industry is forecast to reach $997 billion in sales in 2023, driven in part by higher menu prices. And its workforce is projected to grow by 500,000 jobs, for total industry employment of 15.5 million by the end of this year, surpassing pre-pandemic levels. Meanwhile, household savings declined a little in the last few months but then rose again to almost historic levels. Delinquency rates on credit cards are rising but remain at historic lows.
The Producer Price Index has declined to early 2022 levels
Producer prices, which represent the core costs of materials used to make all the things we consume, are coming down. After reaching an all-time high in June 2022, the commodity index has fallen to March 2022 levels. And although many businesses are dealing with double-digit increases in most of their costs compared to two years ago, they are seeing light at the end of the tunnel as these costs seem to be on the downswing. Lower PPI is a leading indicator for lower inflation, so let’s keep an eye on that.
Manufacturing backlogs are rising
If you look at manufacturing indexes around the country, you’ll see contraction everywhere, which isn’t great. But here’s a bright spot to keep watching: backlogs. The Institute of Supply Management reports that backlog levels in February, while still significantly below what we saw a year ago, are almost 10 percent higher than they were at the end of 2022 and are on the rise, which should turn into an increase in manufacturing activity in the coming months.
So are orders for both durable and non-durable goods.
Orders for durable goods (i.e. appliances, computers, televisions, cars, trucks) are not only 18 percent higher than they were at this point in 2021 but are rising from lower numbers at last year’s end.
Meanwhile, non-durable goods (products made of paper and paperboard, paper and plastic plates, disposable diapers, clothing and footwear, linens, etc.) are also near all-time highs and have shown increases in every month since last July.
Wholesale inventories are decreasing
High inventories are bad, and in the second half of 2022 manufacturers had very high inventories. But the good news is that levels pretty much peaked in November and are starting to edge down through January. I’m very interested to see what February shows.
Services industries remain strong
The Institute of Supply Management’s services industries barometer indicates that businesses providing services (landscaping, construction, accounting, technical, etc.) are still going strong, with levels consistent with what we saw in 2016 through 2020.
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Yeah, I know. There are a bunch of metrics that will support the theory that the economy is going to hell. But no matter how good or bad an economy is, there will always be good or bad news somewhere that will support someone’s narrative. That’s because we live in a huge country with states that have economies bigger than many countries. So, things can be good somewhere yet bad somewhere else.
But the trends I’m seeing in this data indicate that, like in 2022, things really aren’t as bad as they seem.
Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.
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