The government’s first guess at GDP growth in Q1 was -1.4%, it was supposed to be 1% (“consensus”) but even that would be shockingly low compared to the over 6% in Q4 2021. Maybe it was just a “mathematical quirk in GDP accounting” as the trade deficit math wiped out solid consumer and investment spending. If Q2 growth follows suit in negative territory, we will have a “rule of thumb” recession of back-to-back negative quarters. The Administration sees no recession, the Fed seems to be on board as well with scheduled rate hikes still in place. But small business doesn’t agree, and they are the ones in the trenches every day making up nearly half of the private economy.

Asked in March about expected business conditions over the next six months, a 48-year record high said they would be “worse” than when they filled out the survey. Fifty-four percent expected the economy to worsen. Responses have not been this negative since Q3 1979 and Q2 1982, leading into one of the worse recession periods in history. Expected Business Conditions (Figure 1) loudly anticipates a recession, and the indicator hasn’t been wrong for 48 years.[1]

By industry the expectations were consistently negative. The most optimistic (well, the least pessimistic) were firms in Financial Services and, perhaps surprisingly, Manufacturing. The ISM index is holding its own in agreement with our manufacturers. Construction firms are concerned about the Fed and its impact on mortgage rates. Already on the rise, higher mortgage rates will reduce the demand for new homes.


Other NFIB indicators are flashing a sympathetic “red” signal as well. The percent reporting that the current period is a good time to expand has declined to just 4%, compared to 15% in June last year. The net percent of owners expecting real sales to rise wad 12%. The stock market had a grim run in April. Unfortunately, there is more bad news to come.

[1] Regression of percentage change in GDP on change in % expecting worse/better business conditions in six months: 2.64+.539 * BUSCOND, R2=.33, changes in GDP in excess of +- 10 are truncated to +- 10.


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