The Road Ahead In 2023
The Good, The Bad And The Ugly
The new year is a great time to reflect on the past 12 months, analyze current and future trends, and strategize new ways to improve your bottom line. Planning is a challenge when you’re dealing with constant disruption and the highs and lows of this turbulent economy. Facing external economic pressures is challenging enough, but dealing with cleaning one’s own house adds to the complexity of growing your business. Many business owners may not know the amount of inefficiencies and waste happening all over their enterprise. From too much manpower in a delivery fleet to wasted raw materials in a production workflow, overlooked waste can lower a business’s profit potential.
On the heels of the unprecedented volatility of 2020 and 2021 which delivered the deepest global downturn on record, 2022 followed by producing the strongest historical rebound ever in the U.S.
Equipment and software investment grew in the second half of 2022, providing a solid foothold for what may be a more challenging year for the economy and industries in 2023.
No sector has successfully evaded supply chain delays or disruptions this past year, or for that matter, the previous two years. The current priority for equipment manufactures is to automate their production and streamline their supply chain. Prior to the pandemic, proprietary systems, rigid production processes and constraints in the speed of adopting automation have restricted the financial and technical capacity of equipment manufacturers. With higher than expected demand in the last half of 2022, manufactures have increased production and risen to the challenge to fulfill their back orders.
In order to secure equipment financing in 2023, small business owners may be challenged by a potential recession which means fewer traditional funding options and higher rates in the foreseeable future.
Throughout 2022, the Federal Reserve has raised rates numerous times and has stated that they will continue to do so into the first half of 2023. The red-hot job market isn’t making the Fed’s job any easier as supply chain issues are still a concern.
This policy of monetary tightening is not exclusive to the U.S. Many countries across the globe have followed suit. Nearly 45 countries have raised rates to combat inflation.
Economists and investors see the inherent dangers of this precarious balancing act that puts pressure on policymakers to rein in their economies without sacrificing growth. As the World Bank and other institutions issue bleak forecasts, concerns of a looming global recession have grown.
The Good – Economic Tailwinds
The U.S. economy expanded in the 3rd quarter of 2022 preceded by two consecutive quarters of decline, growing at a 2.9% seasonally adjusted annual rate (SAAR), mostly due to robust net exports and strong consumer spending which offset a decline in business investment.
The significant ramp up of semiconductor manufacturing in the U.S. takes some pressure off domestic equipment manufactures allowing them to produce best-in-class machines as well as enhance line management software that improves productivity and efficiency.
Job openings remain well above pre-pandemic levels as the economy added 261K+ jobs in November 2022. However, ongoing Fed rate hikes may slow the labor market down.
Equipment investment has maintained steady growth since the onset of the pandemic. The construction industry, for example, added 20,000 jobs in November and companies continued to raise wages for hourly workers steeper than other sectors.
The pandemic radically altered global supply chains, forcing many businesses to reconsider the vulnerability of their supply chains. A 2022 Deloitte survey reported that 2/3 of surveyed manufacturers plan to shift capacity to the United States and nearly 1/4 of their freight from Asia is expected to shift to the Americas by 2025.
Equipment order backlogs remain strong in many sectors even as manufactures continue to face supply-side challenges, limited material availability and labor problems.
Congress passed three major bills over the past year:
- The Infrastructure Investment and Jobs Act (IIJA)
- The CHIPS and Science Act (CHIPS)
- The Inflation Reduction Act (IRA)
With a total of at least $600 billion in new spending, these bills are expected to perform as a catalyst in promoting new growth within the manufacturing sector and building greater supply resiliency on domestic soil.
The Bad – Economic Headwinds
As a result of geopolitical turmoil, rising interest rates, and a slowing Chinese economy, global growth is expected to slow drastically in 2023. While many developing nations will be somewhat more insulated, the International Monetary Fund (IMF) predicts advanced countries, particularly those facing energy shortages, will experience the largest slowdowns.
In the last half of 2022, U.S. residential home prices fell at their fastest rate since the housing market collapse that preceded the Great Recession. Because of quickly rising interest rates, would-be home buyers will be slow to sign mortgages causing declines in home sales. Mortgage rates will take center stage in 2023 with high rates likely to make it the slowest housing-market year since 2011.
Buffeted by rate hikes and concerns about the strength of the economy, the U.S. Treasury market has experienced several brief drops in liquidity. Some economists have expressed concern that heightened volatility could trigger a broader financial market contagion.
While the 2022 selloff in the S&P 500 has been mostly driven by inflation and central bank tightening, equity strategists believe the next phase will be driven by negative estimates revisions. After losing 20% in 2022, the S&P 500 could keep falling as bleak near-term outlooks for corporate earnings keep stocks muted. After three consecutive years of positive returns, the benchmark U.S. stock market index is set to record the worst annual performance since 2008.
The Fed raised rates in 1929 to squash financial speculation and again in 1930, Congress passed Smoot-Hawley in 1930 putting 50%+ tariffs on more than 20,000 goods and pushing the global economy into the Great Depression. If the Fed does not pivot to lower rates in a timely fashion, it may be reminiscent of 1929.
It’s good news that central banks will likely stop raising rates sometime in late 2023, which should result in a sustainable recovery of the economy by the end of the year. The bad news is in order to pivot to lower rates, we’ll have to endure more economic weakness, increasing levels of unemployment, and stock market volatility in the first half of 2023.
New Business Grows Despite Challenges
Nominal new business volume growth has been solid for most of 2022. Nonetheless, high inflation continues to cut into real New Business Volume (NBV). New business volume was up 5.8% year-to-date in October. After a lackluster 2nd quarter in 2022, business investment grew in part to strong equipment investment growth in the 3rd and 4th quarters.
Even facing rising interest rates and a slowing global economy, the manufacturing sector continues to outperform expectations. Activity appears likely to decline in 2023 given the fears of an outright recession. Optimists, however, highlight recent pro-industrial legislation and supply-chain reconfigurations, both of which should give the manufacturing sector a leg up this year.
While some sectors of the economy continue to expand despite rising interest rates, growth is starting to decline for most. As the Fed’s rate hikes take effect, business investment is forecasted to wane leading to slower economic growth.
Lending activity to small independent businesses remains positive at least for now, even though small business owners continue to express pessimism about their prospects in 2023.
It’s a good sign that Gross Domestic Product (GDP) bounced back during the second half of 2022, but underlying economic conditions remain volatile. Consumer spending is still up, even though credit card debt is rising and the savings rate is getting quite low. The labor market is still strong, but the Fed’s war on inflation via rate hikes is likely to push unemployment up. The housing market is showing signs of weakness, financial markets are highly volatile, and the global economy is slowing down.
A soft landing is still possible, but expect a mild recession starting in the second quarter of 2023.
Expect Traditional Lending To Constrict
The process of growing a small business generally involves two kinds of significant financial outlays – working capital investments for operational growth like hiring employees and managing increases in overhead expenses, and fixed capital investments for the acquisition of equipment and other hard assets.
As the economy slows, expect banks to further reduce their exposure to small business credit. As banks scale back their lending to small businesses, owners will have fewer options for financing.
When looking for new lines of credit from traditional banks, expect rate increases. Consistent revenue and strong credit will always be beneficial to small business owners, but what if you wish to conserve your cash flow in uncertain times? Financial alternatives such as equipment leasing will protect your cash, allow for flexibility over time and may offer lower monthly payments.
Because of the Fed’s continuing rate hikes, small business owners can expect to pay more for capital and as a result, should be judicious with their cash flow and conservative with plans for expansion. If you need equipment, the time is now to buy as rates are expected to continue rising.
Build Relationships That Matter
Small business owners should be considering their funding options today and developing relationships with both banks and alternative lenders in order to understand what capital they qualify for and at what price. Knowing your capital options is essential for small business owners looking to navigate what is likely to be a challenging 2023. It’s these relationships that help business leaders better navigate through times of uncertainty.
Purchasing equipment is one of the biggest expenses for entrepreneurs. Business owners may need to purchase equipment or machinery to get up and running, and existing businesses may need to replace outdated equipment. Equipment leasing can help if your business doesn’t have the extra capital on hand. According to the Equipment Leasing and Finance Association (ELFA), 79% of U.S. companies use some kind of business funding to acquire equipment.
The value of equipment is in its operation. The ROI calculation of an equipment lease clarifies how quickly business owners can make their money back when compared to the initial outlay and costs associated with traditional bank funding.
Typically, small businesses are more impacted by economic conditions than larger businesses. According to the U.S. Small Business Administration, there are more than 32.5 million small businesses in the United States, and 13% of these businesses are startups. In the beginning, small businesses need more sources of financing and are also negatively impacted by today’s interest rates. The Fed’s rate hikes are making it more expensive to borrow money, driving down cash. High inflation also tends to disproportionately impact small businesses since they don’t have the buying power large businesses do. Because the of the Fed’s commitment to fight inflation with rate increases throughout 2023, small business owners may see the first half of 2023 as an opportunity, making it potentially an ideal time to lease business equipment.
To develop consistent and predictable growth, finding the best equipment funding source for today but also for tomorrow is essential. Communicate often to build the relationship and stick with your financial provider in order to perform beyond expectations. That way, if you need exceptions or a bump here or there on a deal, they’ll be more likely to approve. If you are currently looking for a new funding source for your next equipment purchase, please consider Commercial Capital Company.
Let’s Start The New Year Off Right
It’s important to mitigate the risks while also reaping the rewards as the economy recovers. At Commercial Capital Company, we have been able to turn uncertainty into opportunity by listening to our clients and providing them with financing solutions that help their small businesses grow.
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