October 18, 2022 | Last Updated on: January 17, 2024
DISCLAIMER: This article was written in 2022 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.
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American entrepreneurs are concerned about inflation and unemployment. Last month all eyes were on the Federal Reserve as the Fed increased interest with the third 75-basis point raise this year. The rate hike imposed on September 21, 2022, put the Federal Funds rate at 3 to 3.25%, the highest it has been since 2008. The rate, from which the Prime Rate and lender interest rates are set, has consumers and small business owners discouraged about the direction of the inflationary rate.
While it is complicated to understand why the Fed raises rates, it is important to note that the Federal Reserve adjusts the Federal Funds rate to combat inflation. One tool the Federal Reserve uses to measure the financial health of the economy and make decisions about rate increases or decreases is the monthly jobs report. The public also looks to job reports to indicate whether the labor market and the economy will improve.
The jobs report for each prior month is compiled and released by the Bureau of Labor Statistics (BLS) on the first Friday of each month. The report highlights the U.S. unemployment rate and any changes in the hours and average hourly earnings reported by the labor market. Actual earnings data is collected and used to predict labor cost trends, while the number of hours worked is used by the BLS to predict the current demand in the labor market. The monthly jobs report shows the impact of each industry on the economy and on individual socioeconomic groups. The jobs report is calculated and prepared based on data retrieved in two surveys.
The September Jobs report was released on October 7, 2022. The report, as expected, revealed indications of both positive and negative changes for the labor force, entrepreneurs, investors, and consumers. The unemployment rate calculated as of September 30th, 2022 was 3.5%, which showed a decrease since the 3.7% reported in August. In part, the decreasing unemployment rate was due to an impressive 263,000 job gains during the month.
Continue reading to learn about how these recent results can affect inflation, unemployment, and small business owners.
The term recession is used to describe a prolonged economic slowdown. The prospect of a recession is determined by the U.S. National Bureau of Economic Research (NBER) and is based on factors contributing to real income, purchasing power, employment status, consumer price index (CPI), retail sales, and the gross domestic product (GDP). In the economic cycle, a recession may also be called a contraction and follows the peak of a period of rapid economic growth. Common traits in a period of recession include high-interest rates, increased prices, and high unemployment. During 2022, many small business owners have taken steps to prepare for a recession.
With the release of the last Friday’s report, fears about a possible recession began to subside when the report revealed 263,000 new jobs, which President Joe Biden called an “encouraging sign.” The decreased unemployment rate indicated that despite recent and possible future interest rate increases imposed to fight rising inflation, the economy may not be heading for a recession after all.
The September jobs report showed that the average wage increased by $0.10 per hour for American workers. While wage growth appears as a positive movement, it can contribute to even higher inflation rates. Increased wages indicate that consumers have more available cash to spend on goods and services, driving demand up, without necessarily changing the global supply chain issues we still face. Inflation is driven by the concept of supply and demand in the country and results in higher interest rates, which is intended to slow down the borrowing power of consumers and businesses. As the interest rates increase, consumers have less money to pay for everyday necessities like the costs of utilities and groceries. This slows down the movement in supply and demand, intended to give the U.S. economy and the supply chain time to recover and respond to current demands.
The inflation rate is reported to be 8.2% for the 12-month period ending September 30, 2022, which is the highest it has been in over two decades. The rate has not yet been significantly impacted by the last year’s improvements in the supply chain issues or lowered import costs, although those factors were considered positive trends for financial markets. In a press conference following the monetary policy changes at the last Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell announced that the “main goal is to reduce inflation and restore balanced economic growth.” Although recent raises in interest rates were intended to fight inflation, it is not safe to say there is a soft landing on the horizon. The target rate for inflation is 2%, which has economists wondering how high the interest rates will need to go to combat the current rate of inflation.
The unemployment rate is determined from data collected by the BLS and reported in the monthly jobs report. To calculate the unemployment rate, the BLS divides the total number of jobless people by the total number of people in the labor force. To compute the rate as a percentage, the BLS only considers people that are able, willing, and actively looking for work as unemployed. Individuals that aren’t working and aren’t looking for employment are not considered in the calculation.
Despite the fact that analyzing employment statistics for a period as short as one month doesn’t support a trend, the unemployment rate is still used as one of the tools to make economic health forecasts. There is not currently a more accurate method of measuring unemployment. The unemployment rate, as reported by the BLS, indicates the amount of demand in the labor force and contributes as an indication of inflation.
The unemployment rate revealed in the September jobs report is 3.5%, which was the reported rate in the July jobs report. In August, the unemployment rate increased to 3.7%, so analysts are pleased to see the number moving in the right direction. The September jobs report also stated that the groups reporting the highest unemployment numbers, were teenagers between the ages of 16 and 19 and adults with a high school diploma, but no college education. The most common reported reason for unemployment was folks that had lost their jobs due to layoffs or just completed a temporary assignment. Participation in the surveys remained strong, coming in just under pre-pandemic levels.
The monthly jobs report also reports on unemployment in specific industries and recently showed job growth in the hospitality, leisure, and healthcare fields. While each report highlights any circumstances that affect unemployment, like Covid-19, the war between Russia and Ukraine, and natural disasters, it also notes when the results were not affected. In the September report, it was noted that Hurricane Ian, which made landfall in the southeastern United States in late September did not have any impact on the surveys. It is unknown if the impact of Hurricane Ian will affect the October jobs report.
What does the unemployment rate mean for the Federal Funds rate? According to the chief economist, Jeffrey Roach of LPL Financial, the “labor market is still exceptionally tight and the declining unemployment rate may frustrate the Fed if wages continue to be driven up.” Other experts, like Sarah House from Wells Fargo Securities, are predicting that the FOMC policymakers will impose an additional rate hike when they meet in November. Ms. House and fellow Wall Street analysts expect to see one or two more rate hikes of three-quarters of a percentage point in the fourth quarter.
The major impact on small business owners doesn’t come because of the jobs report, but because of the changes in the economy following the report. Small businesses often see a decline in revenues during periods of high inflationary rates. This is because, despite the decreasing unemployment rate, a large portion of the population cuts back on spending. Consumer spending on optional goods and services decreases because customers are spending more money on mortgage payments and groceries. The cost of doing business also increases as supply prices, wages, and financing costs increase.
The cost of inventories and supplies increases during times of high inflation. Manufacturing costs, shipping costs, energy prices, and the costs of raw materials all increase as a response to increased demand, supply shortages, and increased production costs.
As the unemployment rate declines, the cost of labor for small business owners increases. There are fewer members of the labor force looking for work, so those that have it demand higher pay. Wages are also determined in part by the cost of living, which increases during periods of high inflation.
As the U.S. Central Bank, or Federal Reserve, increase rates, interest rates rise at banks and lenders. For borrowers with variable interest loans, their monthly payments increase. For small business owners that depend on loan funds to operate, inflation puts significant stress on their bottom lines.
With the costs of supplies and labor increasing and customers cutting back on their own expenses, many small business owners are looking for ways to protect the future of their businesses. The following tips may help small businesses stay afloat, even during an economic downturn.
It is important to optimize the potential to earn when tough times arise. Consider launching a new marketing campaign or running a special on goods or services to keep revenues flowing in. Offer referral rewards for customers that bring in new business or work with neighboring businesses to host public events.
High inflationary rates increase many costs for small business owners, so it’s important to save money wherever possible. Consider canceling unnecessary subscriptions, negotiating price reductions, or delaying job openings.
Even though some interest rates are high, a small business loan may be the best solution to get the capital you need to survive tough times. Consider working with Biz2Credit to see if an SBA loan, business line of credit, or term loan is the right loan option for your business needs.
While the September jobs report showed that the unemployment rate is on the decline, it did not reassure analysts concerned about the effects of inflation. According to Nick Bunker, the economic research director at Indeed, the report is “quite deflating.” Rising interest rates and inflation rates are intimidating for small business owners, but there are steps you can take to protect your business. Consider making efforts to reduce expenses, increase revenues, or seek outside financing, as Vijay Rao did for his New York restaurant.
