For more in depth information regarding this article, download the entire report here.

This article was written by Brodie Oldham, Vice President of Commercial Data Sciences from Experian Business Information Services. Beyond the Trends is a quarterly report written by Experian Business Information Services. The report offers a unique view of the small business economy based on what we see in the data. With up to date information on over 33 million active businesses and how they perform from a credit standpoint. Experian will share insights and commentary on how economic conditions, public policy, and other factors might shape future small business performance.

As the U.S. economy cools, small businesses prepare for the holidays and the stress of wrapping up another year. The U.S. consumer has exceeded market expectations by spending beyond savings and looking at leverage to continue the behavior. Costs for core expenses continue to rise and notably impact spending capacity. Emerging consumers, Gen Z, are leveraging at a higher rate than prior generations to the detriment of their credit health. This spending trend is cooling as consumer sentiment has been slowing coming into a U.S. election cycle where uncertainty is on the ticket. Small businesses will enter the holiday season with inventories building in anticipation of positive growth to close the year. Credit markets are open, supporting consumers and the businesses they frequent, with looser credit criteria as the market feels poised for a soft landing, a holiday gift.

U.S. Basking In a Hot Small Business Economy

Small businesses are crucial for holiday retail sales, fostering local economies and offering unique products that cater to niche markets. They account for 44% of U.S. economic activity and employ nearly half the U.S. workforce. During the holiday season, small retailers often generate 20-30% of their annual revenue, and according to a survey by the National Retail Federation, 75% of consumers plan to shop at small businesses during the holidays, highlighting their significant impact on holiday spending.

Retail Looking For Relief

As retailers prepare for the 2024 holiday season, they are fine-tuning strategies to manage inventory efficiently amid evolving consumer demand and supply chain uncertainties. Large retailers like Walmart and Target are leaning into advanced data analytics to optimize stock levels, avoiding the costly overstock situations of previous years. Walmart, for instance, increased investment in real-time inventory tracking technology in 2023, allowing for more agile adjustments to in-store and online stock based on regional consumer demand trends. In 2024 there will be less focus on point promotions, and added focus to getting low cost items in customer’s hands earlier in the season. Target focuses on smaller, more frequent orders with suppliers to better navigate supply chain volatility while enhancing their in-store pickup and delivery services to keep fulfillment fluid. Across the board, these companies diversify suppliers and prepare contingency plans for potential disruptions. With a volatile economic landscape and increasing pressure from e-commerce competitors, retailers prioritize flexible and responsive inventory systems to close 2024 in a strong position.

Retailers have refined customer engagement strategies over the last 24 months to cater to shifting consumer expectations. For the 2024 holiday season, retailers will focus on personalized experiences and blending physical with digital interactions. Established retailers face increasing competition, from online marketplaces, are strengthening customer service offerings by expanding virtual consultations and live chat options with Ai assistants, allowing customers to get real-time advice for holiday purchases. This focus on personalized, expert-driven engagement responds to a growing demand for convenience and tailored service.

Department store retail adapted by deepening its omnichannel approach, integrating online and offline shopping more seamlessly. For example, expanding local hubs which provide services like in-store pickups, returns, and personalized styling appointments without holding inventory. This enables them to focus on customer interaction rather than just transactions, fostering a more engaged and loyal customer base in a satellite strategy.

Retailers increasingly focus on sustainability and social engagement as part of their customer outreach. Brands like Patagonia promote eco-friendly holiday shopping by emphasizing their repair and resale programs, appealing to the growing segment of environmentally conscious consumers.

These strategies reflect a clear pivot toward personalization, convenience, and value-driven engagement as retailers close out 2024.

Small businesses remain a cornerstone of the U.S. economy, contributing significantly to job creation and economic activity. According to the latest data from the Small Business Administration (SBA), there are approximately 33.5 million small businesses in the United States, constituting 99.9% of all U.S. businesses. These small enterprises create two-thirds of all new jobs and contribute 45% to the U.S. economic output.

Small businesses are the backbone of local communities, fostering economic growth and creating opportunities for emerging entrepreneurs, including immigrant populations. According to the U.S. Small Business Administration, small businesses create 62% of net new jobs in the U.S., providing vital employment opportunities in local areas. Additionally, immigrant entrepreneurs own over 25% of small businesses, significantly contributing to economic diversity and innovation. Small businesses also reinvest more of their revenue locally; for every $100 spent at a small business, approximately $68 stays in the community, compared to $43 when shopping at larger retailers. This reinvestment strengthens local economies and supports community services, further amplifying their impact.

Global Challenges to Small Business Health

The global macroeconomic environment is characterized by sluggish growth, rising geopolitical tensions, and persistent supply chain disruptions. These factors directly impact small businesses in the U.S., particularly as they plan for 2025.

Global GDP growth: The World Bank’s forecast for growth in 2024 is just 2.6%, marking one of the slowest paces since the financial crisis. This cool growth environment dampens demand for U.S. exports and intensifies competition in sectors like manufacturing and retail.

Supply chain disruptions: According to the Federal Reserve, over 30% of small businesses report significant supply chain challenges, primarily due to the ongoing war in Ukraine and heightened tensions in the South China Sea. Critical sectors like electronics and consumer goods struggle to secure components, delaying production and inflating costs. Ongoing challenges with global logistics, coupled with geopolitical tensions, have necessitated the diversification of supply chains.

Rising input costs: Inflation in core inputs, such as energy and raw materials, remains high, with energy costs up 12% year-over-year globally. This puts a strain on small manufacturers and service providers who rely on steady supplies to maintain margins.

These data points play into resiliency and macroeconomic strength conditions, which are weighed as part of the Federal Reserve’s velocity of activities needed to stabilize the U.S. economy and maintain positive employment.

Supply Chain Disruptions to The Retail Industry

Due to global supply chain disruptions, U.S. small businesses need help obtaining essential commodities and products. Industrial strikes at major French and German ports over the summer have reduced cargo throughput by $6 billion in lost trade, creating small business inventory and supply delays. Many small U.S. businesses, particularly those reliant on imported goods such as electronics, clothing, and specialty items, are experiencing longer wait times and increased shipping costs. These delays could be preventing their ability to restock holiday inventory in real time, especially for high-demand items. Extreme weather conditions like torrential rains, drought, fire, etc... are further constraining global shipping routes. Low water levels, for example, in the Rhine River 2022-2023 reduced shipping capacity by 30%, limiting the flow of essential goods like chemicals, machinery, and other raw materials to U.S. markets. Small businesses scramble to find alternative, more costly transport solutions. These combined factors are expected to result in just 3-4% growth in U.S. holiday retail sales, compared to the 5% seen in previous years, as small businesses struggle to meet consumer demand amidst these challenges.

Macroeconomic Environment and Small Business Resilience

On September 18, 2024, the U.S. Federal Reserve implemented a fifty basis point cut, reducing the federal funds rate to 4.75%- 5.00%, marking its first rate cut in four years, generating an effective federal funds rate of 4.83% as of the end of September. This rate is a key indicator influencing various economic factors, including auto, personal loan, credit card, mortgage, and small business lending rates.

Several key macroeconomic indicators drove this decision. Inflation, which had surged to a peak of 9.1% in mid-2022, had since declined to 2.5% by August 2024, nearing the Fed’s long-term target of 2%. The labor market showed signs of weakening, with the unemployment rate ticking up to 4.2%, prompting concerns about sustained employment levels. The Fed projected further softening in the labor market, with expectations for unemployment to reach 4.4% by the end of the year. The September job numbers are stronger than expected and may put a kink in the Federal Reserve rate cutting strategy and outlook for closing out 2024. GDP growth projections for the third quarter remained stable at around 3%, reflecting a more modest economic outlook.

Unexpected market impacts

Interestingly, the fifty basis point cut had some surprising effects. Mortgage rates dropped to an 18-month low of 6.2%, spurring a moderate wave of refinancing activity as homeowners rushed to take advantage of lower borrowing costs. Mortgage refinancing applications surged by 15% within a week of the cut as homeowners rushed to capitalize on lower interest rates. While large corporations benefited from reduced borrowing costs, small businesses faced mixed outcomes, as some lenders tightened their credit standards amid concerns over future economic stability.

Due to several key economic factors, the Federal Reserve is likely to reduce the Federal Funds Rate slowly and moderately over the next 24 months.

Consumer spending

In 2024, U.S. consumer discretionary spending has been declining, with inflation and rising interest rates putting pressure on household budgets. By August, retail earnings reports revealed that large ticket items, such as home improvement projects, saw a 5.8% drop in transactions over $1,000, reflecting consumers’ hesitancy to finance larger purchases. Inflation, while easing, remains a factor, with core costs like rent and auto insurance continuing to rise, leaving less disposable income for non-essential goods. Reports from retailers like Target and Home Depot highlighted the cautious nature of consumers. Target saw a 2% increase in same-store sales, but only after significant price reductions on essential goods. Discretionary spending categories like apparel only recently showed signs of recovery after a year-long decline (Lipper Alpha Insight). While there are signs of modest improvement in consumer sentiment, the high cost of living and tighter credit conditions weigh heavily on discretionary spending.

Will 2024 end with a perfect storm or the dawn of a new era of optimism?

As the final months of 2024 unfold, small businesses are navigating an economic environment that, while challenging, offers several opportunities. Despite cooling consumer sentiment and rising costs, small enterprises remain a cornerstone of local economies, driving job creation and fostering innovation. The upcoming holiday season presents a crucial moment for businesses to capitalize on evolving consumer demand, with many adopting data-driven strategies to optimize inventory and maintain operational efficiency. Though higher energy and material costs persist, enterprises show remarkable resilience, adjusting quickly to supply chain challenges and shifting financial conditions.

Small businesses are increasingly turning to flexible financial strategies and innovative solutions to manage the high cost of borrowing. The Federal Reserve’s recent rate cut offers some optimism, but the cost of capital remains elevated. This environment requires businesses to strategically manage their credit and plan for long-term growth. As the year winds down, the focus will shift to adapting to consumer preferences and preparing for 2025 with strong financial foundations.

Small business lenders should avoid distractions from the election cycle, recognizing it as a brief interruption in broader economic trends. Instead, they should focus on the behaviors and analytics that drove their past success, concentrating on strategic planning and opportunities for growth over the next 12 months.

Experian’s small business credit bureau data and analytics are key tools for navigating these lending challenges. By providing deep insights into creditworthiness and risk management, our analytics help businesses secure the right financing to meet their goals. As lenders become more selective, those who act decisively and leverage credit insights effectively will avoid the fear of missing out (FOMO) on growth opportunities, ensuring they stay ahead of the competition in the coming year.

The crisp cool air reminds us it is time to change behaviors and prepare for the changing seasons. Your business is going through that same transformation, so be prepared ahead of the market conditions.

For more in depth information, download the entire report here. 

 

About First Community Bank and Trust
First Community Bank and Trust is a privately-owned bank. Established in 1916 First Community Bank and Trust has been serving Beecher, IL, Peotone, IL and the surrounding communities for over 108 years. Our commitment to providing the best banking products and services is matched only by our outstanding customer service. We offer traditional community banking services, including mortgage, consumer, and commercial lending, as well as state of the art electronic banking services.

Press Contact:
Steve Koehn, Senior Vice President
First Community Bank and Trust
(708) 946-2246

 

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