Anna Rathbun is the Chief Investment Officer at Retirement and Investment Solutions – a practice of CBIZ Investment Advisory Services. Because her clients are mostly small and mid-sized businesses, Anna knows a lot about what’s going on in the world that affects them. So what should small business owners – like myself – be thinking about as we begin a new year? We spoke for a while (you can see our entire conversation here) and I’ve included a few key excerpts from our conversation.
Gene Marks: We’re having this conversation in the middle of December. Anna, I’d love to hear your thoughts overall about the economy and the consumer. Do you think there’s going to be a fallout in consumer demand in 2024? Or do you think the American consumer’s going to continue to spend?
Anna Rathbun: Well, if you can rely on anything in the American economy, it’s the American consumers continuing to spend. One of the things that became clear in the last few months is that Americans are spending even though they may not have the best personal balance sheets. We’re spending down our savings and perhaps the stimulus payments from a few years ago. Credit card balances are over a trillion. On top of that, the interest rate that’s being paid on those balances is much higher than a year ago because rates have in general gone up. This is not looking very healthy for the American consumer.
Gene Marks: What economic metrics do you consider to give you an idea of what’s going on?
Anna Rathbun: I like to look at the consumers because 70 percent of our GDP is really driven by consumption. That’s a really important factor. How are Americans doing? Are they struggling? Are they thriving? How are they spending? Are they spending by borrowing from the future? These things matter to me. For businesses, a good indicator would be the ISM’s Purchasing Managers’ Index. Those indices will tell you underneath how businesses are feeling. We also have a CBIZ Main Street Index. We’re a national firm, so it gives us a good pulse into the small and mid-sized businesses across the country in different industries. That also gives us a sense of how businesses are feeling and how those sentiments are changing over time.
Gene Marks: Most of my clients and readers are dealing with significantly higher prices than what they were seeing just two or three years ago. Are you seeing the same thing?
Anna Rathbun: Inflation getting better just means it’s going up more slowly. Unless you see full-fledged disinflation or deflation, the levels aren’t going down. So, we’re still going to have to grapple with high prices. It’ll probably take us some time. Also, inflation depends on what sector and industry you’re in. If you’re in a goods sector, you’re probably seeing inflation come down. If you’re still experiencing high prices on the cost of goods side, but the final goods is going down because demand is poor, then that’s a real pressure on margins.
Gene Marks: I’m seeing similar issues. When you mentioned that customers are just increasing prices, do you have any advice on that? Do you just increase prices across the board?
Anna Rathbun: I think a lot of these companies that are respondents in our survey, they have no choice but to raise prices. A lot of these companies, I feel, don’t have a choice because it’s a matter of maintaining a healthy level of cash flow.
Gene Marks: You mentioned earlier, we don’t know when the Fed will reduce interest rates. Talk to me about what you’re seeing in the capital environment this year.
Anna Rathbun: You might see a big downturn in the economy, not necessarily full-fledged recession, but a significant slowdown to a point where the Fed thinks: maybe we need to cut rates. In my mind, the Fed continues to fight inflation because that can quickly get out of control. Whereas a recession is something that’s cyclical, we can go into it, and we can come out of it. If you’re a small business who borrowed money and took out a loan when money was cheaper, even if the Fed cuts rates, it’s still more expensive. So, the market is very excited about the prospect of the Fed cutting, but the question is, down to zero again? Most likely not.
Gene Marks: What impact does this have on the housing market and real estate? How much of a cut would the Fed have to make before home buyers return to the market?
Anna Rathbun: In my mind it has to be at least 250 to 300 basis point cut.
Gene Marks: That’s a lot.
Anna Rathbun: It is. You’ve got high prices, high mortgage rates. It’s a double whammy for any would be homeowner.
Gene Marks: Let’s shift over to financing on the business side. I think the Fed funds rate now is five and a half percent, but I think the primary rate is eight and a quarter to eight point a half percent. Most of my clients are small and midsize businesses, and they’re paying one or two points above that. Has this had an impact on investment and growth and expansion?
Anna Rathbun: When rates are changing that fast, it’s very uncertain where you’re going to be, so people tend to shy away from doing anything, because investing is more of a risk-taking behavior. Now that rates have stabilized, there’s more than there was a year ago. The problem is cashflow because you’re paying more. There’s financing still available. If you have a good balance sheet and you’re in good financial health, banks are willing to lend money. What we’re expecting in 2024 is for there to be higher levels of bankruptcy, because we’re coming off of a low-rate environment.
Gene Marks: As far as finding people what advice do you have?
Anna Rathbun: For the service side, and this involves next generation, Gen Z employees are expecting something different from their life. Flexibility is important to them. Work life balance is really important. It’s not just about the transaction of work and pay, but this sense of my employer cares about the wellbeing of the employees enough to make sure there’s a work-life balance. A lot of this also has to do with culture. If you’re in manufacturing and you need to have people there, this is a lot harder to do. You may want to focus on fringe benefits.
Gene Marks: That’s great. We only have a couple minutes left, we’ve talked about, you know, labor issues. We’ve talked about employees, inflation, interest, cashflow, and the economy. Talk to me about 2024. What are your thoughts overall?
Anna Rathbun: America is such a diverse economy that at any given moment, one industry is in recession, but another industry isn’t. When you aggregate that the GDP is still positive. So, I think it’s unfair to rely on GDP numbers. I think we’re in for a significant slowdown because these rate hikes will work through the economy and the Fed may lower rates, but not enough to make a difference for a lot of people who are still dealing with aftereffects of high inflation. I think the optimistic scenario is a soft landing with a 3.7 percent unemployment rate and sub 4 percent average mortgage rate. Even if the housing market’s a little slow, maybe the balance sheets are okay, and we can avoid a recession. The pessimistic scenario is a recession that’s felt by everybody. You can’t raise rates this much this quickly without ramifications.
