Businesses aren't acting like a recession is coming this year
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- Businesses from large companies to one-person startups are growing on the heels of strong GDP data.
- Consumers are spending more and businesses are investing more in equipment.
- Still, businesses aren't feeling too optimistic, with most still expecting a recession this year.
Tons of people, including business owners, have said that a recession is coming this year even amid robust economic growth. However, big companies are hiring, businesses are expanding, and lots of entrepreneurs are filing to open new startups.
According to new data published this week by the Bureau of Economic Analysis, real gross domestic product surged at an annualized rate of 2.4%, exceeding the 2.0% growth in the first quarter. This was partly due to consumers spending more and business investment being way up. Additionally, businesses are hiring more and paying their workers higher wages.
"Compared to the first quarter, the acceleration in GDP in the second quarter primarily reflected an upturn in private inventory investment and an acceleration in nonresidential fixed investment," the Bureau of Economic Analysis wrote in a news release published on Thursday. "These movements were partly offset by a downturn in exports, and decelerations in consumer spending, federal government spending, and state and local government spending. Imports turned down."
The main measure of business investment in the GDP report is well above pre-pandemic levels, and shows no signs of slowing down ahead of a hypothetical recession.
A rush of federal spending on electric-vehicle factories and chip-manufacturing plants — including from the CHIPS Act and Infrastructure Investment and Jobs Act — has helped boost investment and create more jobs.
The last three quarters have seen sharp growth in spending on factories and other commercial buildings. Real nonresidential fixed investment for structures grew at annualized rate of 9.7% in the second quarter, following the 15.8% seen in the first quarter of 2023 and the last quarter of 2022. That marks a turnaround from the generally negative rates seen between the start of the pandemic and the end of 2022.
Gregory Daco, EY chief economist, said in commentary after Thursday's GDP release that the growth in this kind of investment "continues to reflect the strong impetus" as well as the crowding-in effect "from government spending related to the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act."
Overall real business fixed investment rose nearly 8% at an annualized rate for the second quarter, driven partly by higher spending on equipment as supply chains recover.
"The resurgence in equipment investment was almost entirely driven by transportation equipment and some information processing equipment growth – an encouraging sign that business executives are still driving growth despite lingering recession concerns," Daco stated.
Jobless claims are also falling, reaching their lowest levels since February. This suggests that companies are stridently avoiding layoffs in general. Additionally, the US added 209,000 jobs in June, and the unemployment rate declined from 3.7% to 3.6% — suggesting a still strong labor market in the US.
Entrepreneurs are still founding new businesses at a fast clip, as seen in recent data from the Census Bureau analyzed by the Economic Innovation Group, which found that applications for businesses likely to hire employees rose 7% between the first half of 2022 and the first half of 2023. Nearly 871,000 likely employer applications were filed during the first six months of 2023, the second-largest midyear total ever on record, as noted in the Economic Innovation Group analysis.
Additionally, wage growth is easing per the latest Employment Cost Index release. Wages and salaries for civilian workers soared by a year-over-year 4.6% in the second quarter of 2023, but that's a cooldown from the year-over-year increases seen in recent quarters.
Despite these promising numbers, business owners still fear a possible recession. According to a survey of business owners from Nationwide and conducted by Edelman Data & Intelligence from March 30 to April 28, two-thirds of owners are "expecting a recession in the next six months."
Businesses also aren't feeling too optimistic according to the National Federation of Independent Business' Small Business Optimism Index. According to the June report, an index of 91.0 puts it at the "18th consecutive month below the 49-year average of 98."
"Businesses did a great job managing inventories during the second quarter, anticipating the eventual slowdown in consumer spending," Jeffrey Roach, chief economist for LPL Financial, said in a statement after the GDP report.
Still, an increasing number of signs reveal a recession this year is unlikely. On top of the strong growth and labor market figures, inflation has been slowing, which may mean the Fed is near the end of its interest rate hikes for now. The core personal consumption expenditures price index, a key gauge the Federal Reserve closely watches, was at the lowest annual rate in almost two years per data released on Friday. It surged by 4.1% year over year in June.
On Wednesday, the Fed announced it was raising interest rates by 25 basis points in an attempt to bring inflation down to its 2% target. Fed Chair Jerome Powell confirmed Fed staff do not believe a recession will happen this year, differing from previous Federal Open Market Committee meetings.
These comments point to a soft landing, avoiding a severe downturn while battling inflation. Powell did not indicate whether another rate hike was in the cards this year.
Though many business owners are hesitant about the state of the economy, a significant mix of indicators reveal businesses from electric-vehicle factories to tech startups to clothing retailers are on the right track.
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