Inflation is High, Markets are Down – What Does it Mean for Entrepreneurs?

Inflation remains the main issue for entrepreneurs, and the primary challenge in the economy writ large.

In 2021 we experienced the economic shocks of the Covid-19 pandemic, lockdowns, supply chain disruptions, and resultant cost-push inflation. Fiscal stimulus led to demand-pull inflation; and what the Fed had once described as “transitory” became an urgent structural matter. More dollars were chasing fewer goods; and Russia’s war in Ukraine exacerbated the dynamic as global energy prices rose.

Unemployment is now down to pre-pandemic levels, but workforce participation in lagging in some states (including Virginia). Across the board, most people are feeling the pinch, as wage growth has not kept pace with inflation. The Fed has increased the Fed Funds Rate five times, in an effort to tame inflation. The effort has also resulted in increased financing costs, a strong dollar, a bear market, and risks of recession.

Higher interest rates (APR) mean higher costs for funding household and small business debt. Credit cards and other variable rate lines of credit already cost more. These are being followed by the higher rates in commercial real estate, auto loans, and mortgages. It has also been a difficult environment for raising equity capital.

Entrepreneurs are advised to brace for a difficult B2B and B2C selling environment, to shore up balance sheets with cash reserves, to limit the impact of increases in financing costs, to continue adjusting prices for inflation, and to investigate I-Bonds within broader retirement planning for oneself and employees.

Below we provide an overview of the primary trends in the economy, how they're impacting the capital markets, what it all means for business owners, and how we’re serving clients.

Economy & The Risk of Recession

• The inflation rate hit 8.2%, as the Consumer Price Index was up 0.4% in September. (Bureau of Labor Statistics) This is a part of the price increases that began to take shape in 2021, originally dismissed as “transitory.” Precipitated by pandemic shutdowns, supply chain restrictions, and relief payments. Since March 2022, the Federal Reserve Bank has responded with five increases in its core rate, from 0.25% to 3.25%. (Forbes)
• In October “the unemployment rate edged down to 3.5%,” with notable job gains in leisure & hospitality, and in health care. (Bureau of Labor Statistics) Earlier in July, the U.S. had reached the pre-pandemic employment level. However here in Virginia, and in Maryland, the percentage of the labor force actively participating in a job (labor force participation) is still lagging. (Federal Reserve)
• Although wage levels have increased, for more than half of workers, wage growth hasn’t kept up with inflation. (Federal Reserve and The Wall Street Journal). Another negative indicator – consumer spending has slowed. (CNBC)
• In more positive news, “U.S. manufacturing output, hours worked, and productivity recover from COVID-19” (Bureau of Labor Statistics), with manufacturing output continuing to grow steadily, with a 4.7% annualized increase in productivity (a measure of the value of the goods produced, for each hour worked).
• The U.S. Dollar, as measured by the DXY, has risen 18% in 2022; reaching its highest level in twenty years. This creates pressure on foreign firms and governments servicing dollar denominated debt. For importers it makes foreign inputs less expensive in dollar terms; yet it makes exporting difficult, as products become more expensive in local currencies. (Economist)

Financing Costs & The Bear Market

• Bonds have lost $7trn, or 14% of their value, with some institutional bond holders selling assets to maintain liquidity. (Economist) “The yield for a ten-year U.S. government bond was 3.76%, while the yield for a two-year bond was 4.15%.” (Statista)
• Inverted yield curve is a warning for a coming recession. Indications of this risk have been priced into the market where “Global bond funds see biggest outflows in two decades.” ?Yields have soared particularly in markets for mortgage-backed bonds, gilts and junk bonds (BB+ or lower). (Financial Times and Reuters) ?
• Private Equity remains a difficult market in which to attract capital. “Fundraising is expected to remain challenging into next year.” “Worst fundraising market since the global financial crisis.” “Investors took a more cautious approach in the face of rising interest rates, high inflation, and other economic uncertainty.” (PitchBook and (Buyout Insider)
• “Commodities have been the strongest asset class since the COVID panic bottom in 2020, but commodities have joined stocks, bonds and cryptocurrencies in a bear market.” (Seeking Alpha)
• Stocks, as measured by the Wilshire 5000 all-cap index, have shed $12trn of market capitalization since January. The S&P sell off continues, down 23% for the year, and we could easily see a further 20% loss. (CNBC) The CAPE Shiller P/E ratio, a measure of price to earnings, also indicates “an additional 22.23% downside.” (The Motley Fool)?

For Business Owners

• Build Cash Reserves. Cost of capital is increasing in every area – from rising interest rates for working capital, to difficulty finding equity investors. Find ways to shore up balance sheets with cash holdings by eliminating discretionary operating expenses, squeeze out inventory and other carrying costs, and negotiate towards longer-term fixed rate lines of credit. (Forbes and CNBC)
• Delay an angel or venture capital raise. Individual and institutional investors are under pressure as recessionary risk and bear market losses take hold. This is translating into lower valuations, and deals characterized by tougher terms and demands for higher percentages of a firm’s equity.
• Difficult Sales Environment. Recessionary expectations are translating into lower levels of business (B2B) spending and fewer longer-term investments. Consumers have less discretionary income, and those with variable mortgages face household budget pressure. Expect a more difficult B2B and B2C ?selling environment.
• Continue to re-examine pricing. Keep it competition relevant. Inflation has meant that a $1,000 price tag in 2020, is equivalent to $1,150 today. Avoid leaving money on the table.
• Examine retirement planning. 401k plans and other retirement accounts have seen significant losses. Consider I-Bond purchases, paying 9.62%. Limited to $10,000 - $15,000 per person. (Forbes)?

Helping More People Become Business Owners

• Our newest cohort of business owners has begun their first 4 week sprint. They are examining their problem-solution set, conducting customer discovery to validate their idea, and iterating through their lean canvas writing. A special thanks to Barry Moore and Mike King .
• Community Engaged Research to understand the racial and ethnic disparities when Richmond entrepreneurs are navigating local entrepreneur support organizations (ESOs). Done in partnership with Elsie Harper-Anderson, Ph.D. Harper Anderson of Virginia Commonwealth University, and Chhaya Kolavalli of the Ewing Marion Kauffman Foundation.
• 1 Million Cups is back in person, and held weekly at the Robins School of Business, University of Richmond. This series brings together entrepreneurs for peer learning and professional connections. Follow along for announcements, and to join on Zoom Webinar. In partnership with Miguel Qui?ones and Kenzie Fitzpatrick .
• Capital One has asked us to provide the Credit Builder program. This highly successful one-on-one counseling service helps people increase their scores and lower their financing costs. ?Made possible through the efforts of Jamie Seagraves and his team.

Lastly, we wish to extent our sincere gratitude to these individuals, for our program partnerships and sponsors. It is through their support, and that of over 40 volunteers, that we provide these services that help more people overcome barriers to business ownership.

If we can help you with starting, growing or investing – please get in touch.

--Dale