2024 Economic Paradox: Rising Inflation Concerns Clash with Surging Small Business Optimism

Let’s start the week with the market review. The Russell 2000, a proxy for small business, was down last week. The S&P 600, which looks at the smallest companies, was also down. Both saw drops on Thursday.  

SBA reports show a surge in confidence among small business owners and consumers under the Biden-Harris administration, with inflation falling, recession fears subsiding, and consumer spending rising. Economic optimism among small businesses has hit a 22-year high, with the majority of business owners feeling highly optimistic about the national economy.

The latest inflation report suggests that the disinflation trend of 2023 may have stalled in early 2024. Elevated inflation readings in January and February raise doubts about the narrative that inflation has been quashed and interest rate cuts are imminent. Gasoline prices surged, commodity prices showed signs of increase, and services inflation remains a concern.   Inflation in February saw a year-over-year increase of 3.2%, higher than January’s 3.1%. The Consumer Price Index (CPI) also increased by 0.4% month over month. The core CPI, excluding food and energy prices, increased by 3.8% year over year. The food index slowed to a 2.2% increase, while the energy index saw a decline of 1.9%. The shelter index increased by 0.4%. The job market showed an increase in the unemployment rate to 3.9%, but average hourly earnings rose by 4.3%.

Early data suggests that U.S. consumer spending may weaken despite a strong job market and rising wages. Retail sales bounced back slightly in February, but January’s drop was worse than initially estimated. Other indicators, such as slowing employment for those without a college education and increased credit card and auto loan delinquencies, also hint at a loss of momentum in consumer spending.

According to Kastle Systems ‘ office swipe data for ten major metros, office occupancy levels on the busiest day of the week are at 62% of their February 2020 average.   But, more on that tomorrow.  

First, I want to highlight the Russell 200 and S&P 600.   The Russell 2000 is a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. London’s FTSE Russell Group manages it and is widely regarded as a bellwether of the U.S. economy due to its focus on smaller companies that operate primarily in the U.S. market. The S&P 600 is a stock market index established by S&P Global Ratings that covers the small-cap range of American stocks. It is a capitalization-weighted index, meaning that the market capitalization of each company determines its weight in the index. 

I’m going to work to include this data in our analysis and consider those short-term.  The Russell, for example, is broadly up for the year.     Small businesses are optimistic for the year, and the uncertainty is around inflation and interest rates. Companies might need to reassess their cost structures, pricing strategies, and financial planning to navigate potentially fluctuating costs and consumer price sensitivities.     That will be industry-specific, so as always, know your customers.