major recession signal everybody is missing

 

There’s a major recession signal everybody is missing: small businesses cutting spending as they prepare for the worst

During the pandemic, Aaron Mulherin would travel as far as 150 miles from his home in Marion, Iowa, to do jobs for his glass installation company. But with a gallon of gas in Iowa now going for $4.73, compared to $2.88 a year ago, he has had to shrink that radius to around 60 miles.

“We have been trying to be careful with a lot of things,” Mulherin, owner of AM Glass Repair, tells Fortune.

High gas prices are far from the only pain point Mulherin’s small business is feeling amid inflation reaching a 40-year-high. Costlier materials, longer waiting times for supplies, difficulties finding labor, and even pricier hotels during more distant installations is forcing Mulherin to let some potential jobs slip away, even ones his company would have jumped at a year ago

Mulherin is far from the only small business owner to feel the sting of inflation. During the first quarter of 2022, 85% of small business owners said their business was being affected by inflation, and 67% had already been forced to raise prices, according to the U.S. Chamber of Commerce. Inflation can be catastrophic for small businesses, and many are worried about having to shut down.

“Historically when demand falls small businesses don't have the cushion to survive. They tend to go out of business first,” David Audretsch, a developmental economist at Indiana University and co-founder and editor-in-chief of the Small Business Economics academic journal, tells Fortune.

With fears mounting that inflation will eventually give way to a recession, companies are tightening their belts, and how far small businesses like Mulherin’s go might be an early signal of whether a recession will hit, and if it does, how bad it will be.

“It can be an interesting leading indicator that people tend not to think about,” Audretsch says.

Pandemic-era winners

There’s a reason small businesses are often called the backbone of the economy.

“Small businesses are able to meet local demands and local idiosyncrasies in the markets that the larger companies just can’t meet,” Audretsch says.

Despite their more limited resources, he adds, small businesses can be more flexible and responsive to shifts in markets and in demand than their larger counterparts.

“[Small businesses] see if there's an aspect of the demand that's not being met by the incumbent firms. They can be quick to market, quick to offer, and quick to fill that niche,” Audretsch says.

Local businesses like Mulherin’s were able to fill that niche over the past two years, emerging from the pandemic as clear winners.

“I think the first month or two were a little bit shaky,” Mulherin says of AM Glass Repair’s business during the early days of the pandemic, but the lull didn’t last long.

“After that, once people started working from home, I would say our business doubled if not tripled,” Mulherin says.

The pandemic-era boom times for small business included a surge in entrepreneurship facilitated by the popularity of working from home, more free time, and federal stimulus checks. In 2021, there were 5.4 million applications to start new companies, according to census data, 53% more than in 2019.