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September 25, 2023

The Economic Indicators You Should Care About in 2022

The Economic Indicators You Should Care About in 2022

With a new year comes new beginnings — and new ways of looking at things. As we enter 2022, we were wondering what small-business owners could be looking at to find information that helps them.

To get answers, we spoke to a well-known figure in the world of financial and economic analysis, George Pearkes of Bespoke Investment Group. He regularly appears on financial-news TV shows to talk about the latest developments in the markets and has a reputation for digging deeply into obscure data to generate uncommon insights.

Before digging into specific information, Pearkes said that it can be more important to know what to filter out. “There is a lot of room to present economic data and analysis from a perspective that’s motivated,” he said, and it’s important to keep in mind that a great many offering insights are “selling a product or advancing an ideological agenda.” 

When Pearkes looks at data measuring small-business owners’ sentiment, he sees evidence of the influence of these sources. When the NFIB asks small-business owners how they feel about their business, Pearkes noted, there are wild swings due to political changes that have little to do with any one small business’s prospects, while economic news produces less volatility in business-owners’ opinions.

We asked him to turn his lens toward the world of small business, and tell Inc.’s audience what he would spend his time looking at, if he were a small-business owner in 2022.

An approach to economic analysis for SMBs

If Pearkes were going to create a dashboard of economic indicators for small businesses to look at to assess their business’s near-term prospects, he’d start with:

  • State and local employment data
  • Homebuilding data

Why those two? “It’s definitely helpful for businesses to know, ‘Is the population rising? Is consumer spending rising?'” Pearkes said, and “anything more generalized than [housing and unemployment data] is just not available with public datasets” that are updated on a frequent basis.

Beyond those more immediate indicators, there’s an opportunity to develop a “medium-to-longer” look at local demand, he said, specifically “population consumer spending and gross value added.”

The thinking behind those is generated from an underlying theory of what generates demand for a small business. Pearkes asserted, “If the economy is on a good path, if employment is rising, that’s going to fundamentally change the things that you look at as a business owner in terms of a basic strengths, weaknesses, opportunities, and threats (SWOT) analysis.” 

The broad themes worth tackling start by asking one question: “What’s the trajectory of aggregate demand?” according to Pearkes. “From there, you then spill down into other problems, like ‘How do I expand my margins or improve my return on capital?’ and asking ‘Where are we in the economic cycle — how fast is the economy growing?'”

For many small businesses, local economic indicators are especially important, and, he said, “Local is tough, because we have decent state-level data that isn’t super lagged, but at the metro level it’s [often too] lagged to be useful.” Sticking to just the numbers that are well-covered, like the numbers mentioned above, is a way to get data that’s reliable, meaningful, and fresh.

Finding a theme in broader data

What about national data? Depending on your industry and what’s going on in the broader economy, the specifics relevant to your business could vary broadly. Pearkes recommends working backward from a national issue that affects your business and then finding a metric that tracks it closely.

For example, during the supply chain crunch that the U.S. is currently experiencing, “auto production is a really interesting thing to keep a close eye on,” Pearkes said, because “understanding how many finished cars are rolling out of factories is really helpful for understanding the supply chain.” It’s an indicator important enough to the national economy to be regularly tracked and publicized, but can be used by any business as a proxy for how the supply chain crunch will affect them.

Other statistics to keep in mind:

  • Prime-age employment to population, which tells you how the 25- to 54-year-olds are doing. This data is valuable both for tracking demand and for figuring out how difficult it will be to hire.
  • Actual GDP data from the Bureau of Economic Analysis, and the more-frequently updated, but less accurate, Atlanta Fed GDPNow tracker. This tells you where overall economic growth is going.
  • The New York Fed’s Weekly Economic Index, a seasonally adjusted composite of economic data.
  • “A whole bunch of cool underlying data sets from the ISM,” which tells you about supply and demand in manufacturing.
  • A wide range of data from the five regional Feds that produce manufacturing data.

For all of these, you can look at your own business’s trends over the past number of years, and what these indicators looked like at those times, to get a sense of what your demand and hiring picture will look like when the metrics go this way or that.

Think about who speaks for you

Adding up all of his thoughts about operating as a small business and looking at economic data, Pearkes warned that it’s easy to get confused about what exactly is being talked about when talking about small business. “A full-service restaurant in a major metro area is subject to competitive forces in a way that a fast-food chain in a rural area just isn’t,” he said, but economic reporting and agencies that claim to speak for small business often conflate the two.

When someone calls themself a “small-business owner” or says they “speak up for the interests of small business,” the fact that the world of small business has some large, very distinct groups of businesses means that those people or agencies might not be speaking of businesses at all like yours.

As one indicator of this difference, Pearkes spoke about how differences in measuring small businesses can produce very large discrepancies. “If I’m a franchisee and I own 10 restaurants,” there’s the opportunity to be seen as many small businesses or one larger business, he said. Two different measures of employment in small businesses take different approaches: Payroll processor ADP measures employment at small businesses at the individual-restaurant level, “on the basis of establishments, not firms,” he said, and recently had a tally of 32.3 million people employed in small businesses in the U.S. The Bureau of Labor Statistics takes the reverse approach, measuring by firm instead of individual establishment, and has a number that’s a third smaller: 21.2 million people.

When reading economic analyses of small businesses, it’s important to keep this difference in mind, because the takeaways and advice might be speaking to a category of small business that is quite different from your own.

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