Eyes on the Economy: A Conversation Summary on Economic Trends

We’ve been hearing that the state of the economy is top of mind for Small Giants companies, so we recently held a live virtual event with a panel of rockstar experts to give our community members some insight into what’s really happening and how to use economic trends to best prepare for the end of 2023 and into 2024. 

Devyn Bachman, Senior Vice President at John Burns Research and Consulting, and Lesley Holland, Regional Director Portfolio Management at BNY Mellon Wealth Management, are industry experts in their own rights and have their eyes on the economy. Moderated by Small Giants Co-Founder Paul Spiegelman, here is a summary of our conversation with Devyn and Lesley as they shared their insight across market sectors and economic trends. 

The Current State of the Economy

Through the lens of the real estate and housing market, Devyn highlighted the impact of the COVID-19 pandemic, inflation, and the Fed's response with raising rates. While the resale market has slowed due to high interest rates, the new home market has seen a surge in sales, primarily because of a creative financing tool called mortgage rate buydown which allows builders to buydown a consumer’s mortgage rate (from 8% to as low as 5.25%). However, Devyn made note of an affordability crisis that is not going to be easily solved.

Looking across all sectors, Lesley identified how we’re seeing unprecedented changes in the economy and consumer behavior due to extreme changes in interest rates and the upcoming election year. In light of Covid, there is more global collaboration. The U.S. is also ahead of our global peers, so domestically we are positioned well. This is important for small business owners and investors.

“The one thing that’s changed for the good is there is much more global synergy.” 

- Lesley Holland

Image credit: BNY Mellon

Economic Indicators and Employment Trends

As Lesley pointed out, the stock market is historically about 6 months ahead of the current economic state. The stock market’s performance offers a forward-looking lens of the economy. 

She mentioned that an important indicator to watch is the inverse correlation between the stock market and unemployment rate. So as the unemployment rate decreases, the stock market typically does better. Currently, the unemployment rate is 3.8%, which means that for every open job, 2.5 people are looking. Recent data also shows that 64% of jobs in 2023 were generated by small businesses (or businesses with less than 50 employees). Small businesses are the growth engine of the economy and actually account for over 44% of economic activity. 

When it comes to jobs, more recently we’re seeing reports of solid job creation numbers. However, jobs are being added in lower wage markets, and we’re losing jobs in higher wage markets. 

Lesley indicated that the two main factors for the market remaining resilient are the consumer and artificial intelligence (AI). 

Consumers as a Market Driver

The consumer drives 70% of the US GDP, and now that we are past pandemic restrictions, people are shifting spending into experiences (think vacations). In addition to this experience economy, consumers are also more mindful of spending and efficiencies in what they purchase, so it’s more of a low cost economy, as well. 

AI as a Market Driver

When it comes to AI, the Magnificent Seven are leading the way. These seven companies - Nvidia, Tesla, Meta, Amazon, Alphabet, Apple, and Microsoft - are seeing exponential growth due to their involvement in AI, which has positively impacted the stock market as a whole. The trends we’re seeing with AI are similar to what we saw historically with e-commerce. 

Image credit: BNY Mellon

Generational Shifts are Making an Impact

With the aging Boomer population, Devyn predicts a massive wealth transfer is going to occur. Moving forward, spending power will shift to generations born in the 80s and 90s. 

Lesley noted that people are retiring earlier, and this is impacting the workforce. 

• Recent retirees spent on average 15 years working at a single company 
• People in their 30s have already had at least 2 jobs

As business leaders and owners, this is important to note that younger workers prefer to have multiple, shorter term career experiences. 

Data also shows that Millennials value benefits beyond pay. As Small Giants, we understand that valuing people means more than just the wage they are paid, but people in the workforce are now starting to expect and demand this from their employers. 

Paul shared that as leaders, it’s important to package and communicate the culture as part of a comprehensive benefit. It’s not a question of culture vs wages, but a holistic approach to both. And to decide what is best for your company to offer, “meet the people where they’re at” as Devyn said. Talk to current employees and prospective employees to see not only what moves the needle, but how to best showcase and talk about what you have to offer. 

Housing as an Economic Lens 

An important concept to be aware of is the “share of wallet” or as Devyn described, how consumers are sharing their wallet or dollars especially now that everything is more expensive.

Devyn shared that although mortgages are the largest source of debt for Americans, student loans are a rising second. The average student loan debt is $400/month. With the end of student loan payment forbearance, consumers paying mortgages and student loan debt will have less money to spend on other goods and services and will cut back. 

This leads to an affordability crisis. Devyn said we can anticipate interest rates and inflation probably being a bit higher over the next few years. To paint a picture of housing as an example of this affordability crisis, Devyn described how mortgage rates are the highest since 2000, consumers spend 46% of their income on housing, and home prices continue to rise. Wages would have to jump 47% to counteract this, but incomes have only risen 42% in the last 10 years. Home prices would also have to fall 30%, and mortgage rates would have to jump way back. None of these are likely scenarios.

Moving forward, affordability will be critical because the consumer is stretched in every direction. Businesses will need to adjust to and anticipate consumers’ needs.

“Affordability is going to be key. It’s going to be how can I offer those services and those goods that are affordable because the consumer feels stretched in nearly every direction.”

- Devyn Bachman

AI: The Industrial Revolution of Our Time

Whether you realize it or not, artificial intelligence (AI) is changing work as we know it. Lesley compared AI to the introduction of the railway system back in the 1800s - AI is a modern industrial revolution. And the U.S. is leading the way in AI development. 

As Devyn said, the Industrial Revolution brought new automated enhancements to how people did work. The same goes for AI. Machines and computers are now doing manual work that people used to do. AI helps make us work faster and more efficiently, freeing up our capacity to do other things. And with our country’s population not growing as quickly anymore, AI can actually help the workforce. 

Although there are skeptical concerns about the advancement of AI and the ethical boundaries around it, a major benefit is the safety and security of data protection that AI offers. New business models, technologies, and event industries like cryptocurrency are being built with AI. 

The Role of Historical Relevance 

Due to these unprecedented times that we’re in, historical data can serve as a guide, even if the actual numbers are not as relevant to small businesses. As Mark Twain once said, “History doesn’t repeat itself, but it does rhyme.”

Bearish and Bullish 

If you’re wondering what industries should we be optimistic or concerned about, Devyn and Lesley had some advice: 

• Keeping the “affordability crisis” in mind. Devyn iterated that this also has an impact on businesses at a macro level. High interest rates affect businesses’ access to capital and their overall affordability, as well. As a result, B2B work is on a decline and sales cycles are also longer.  
• On the flip side, Lesley is bullish on healthcare. With new advancements in medicine, organizations that she’s connected to are anticipating domino effects of “healthier people.” This could create unexpected wins to companies’ bottom lines. 
• Lesley is also bullish on the U.S. entrepreneur overall. There continue to be more opportunities to get into the market and grow, and the agility presented by the US economy will continue to have entrepreneurs and small business owners pave the way for economic gains ahead. 
  
  

Image credit: BNY Mellon