Main Street Merchant Recession Expectations Match Fed, Consumer Sentiment

After pandemic and inflation woes, Main Street is digging in to face economic headwinds on the horizon.

Small to medium-sized businesses (SMBs) seeking a chance to recover after the one-two economic punch of the pandemic and elevated inflation may have to wait a bit longer to catch their breath.

As reported this month (April 12) by The Wall Street Journal, persistent inflation and a job market that only dipped earlier this month has led Fed officials to hint at rates being raised at their next meeting. This is despite Federal Reserve staff anticipating an equal chance of a recession happening or not happening later this year for the first time since the Fed starting raising rates roughly a year ago.

The notes coming out of the Fed meeting confirms recession fears held by many consumers and businesses alike, perhaps best illustrated in the PYMNTS collaboration with Enigma, “Main Street Health Q1 2023.”

Although recession fears dipped somewhat between October 2022 and January 2023, a sizable share at the overall sample (59%) still expect the economy to enter a recession in the next 12 months. There isn’t much variability to this belief, as this holds true even when responses are broken down by industry and revenue.

Consumers overall are also increasingly expecting a recession, even as inflation ticks down slightly. Sentiment dropped 8% in March year over year, with the decline taking place before SVB’s collapse. This report came on the heels of Consumer Confidence Index findings that noted that although the index had risen slightly in March, the closely related Expectations Index continues to remain well below the threshold that may signal a recession in the following year.

Recession fears have also spread to financial institutions (FIs) of all sizes, stoking a reported hiring freeze at Bank of America. Citi, for example, publicly predicted a mild recession back in January and has increased its personal banking reserves in case of rising credit and loan losses.

They’re not the only FI to do so. Capital One and American Express are also increasing their rainy day funds out of concerns for the potential of recession. These preparations are turning out to be well-founded, as JPMorgan reported an 82% jump in bad card loans compared to a year earlier. Altogether, the four biggest U.S. banks have written off $3.4 billion in bad loans during Q1 2023.

Battling the current inflation (maybe) turning recession landscape, Main Street has so far generally raised prices to cover the higher costs of running a business. While some savvy SMBs are embracing the cost-cutting benefits automating certain systems may provide, many more are holding off despite overall recession fears. While the temptation towards doing nothing may be appealing, no business wants to be caught unaware when the next financial catastrophe hits.