As inflation surpasses 9% and investors brace for the possibility that the Federal Reserve will raise interest rates a full percentage point, two West Virginia University economists point out that the pain is not created equal, with the economic tailspin hurting some businesses more than others.
Scott Schuh, associate professor at the John Chambers College of Business and Economics and the Center for Free Enterprise, and John Deskins, director of the Bureau of Business and Economic Research and associate professor, predict that businesses providing nonessential goods and services – restaurants, jewelers, salons and gyms, for example – may struggle significantly more than those that offer consumers essentials such groceries, gas or home and auto repairs.
Although their forecast is gloomy for small companies and those with goods tied to interest rates, entrepreneurs may find opportunities to offer services to consumers looking to economize.
“Businesses in industries that produce interest-sensitive goods are most vulnerable to an economic slowdown. For households, these industries include housing and construction, automobiles and other high-value capital goods that are often purchased on credit, like appliances and information technology. Businesses that produce capital goods, such as machines, factories or transportation equipment, also are vulnerable because funding for business investment is typically borrowed through bonds or bank loans.
“In the long run, the U.S. economy is experiencing a trend shift away from goods and toward services. Interestingly, this trend reversed during COVID-19 because consumers could buy goods and have them delivered at home, whereas most services require buying in person, which was a health risk. This cyclical shift to goods has been slowing recently as vaccinations and natural immunity have increased.
“One opportunity is for entrepreneurs in financial and non-financial industries to find ways to help customers manage the impact of inflation, which could take many forms. Consumers who hold a lot of cash that isn’t accumulating interest need to find ways to reinvest their money to get returns and guard their real balances. Drivers need to find ways to economize on gasoline purchases. Consumers could use help finding and maximizing coupons, discounts and other ways to lower prices.” – Scott Schuh, Associate Professor, John Chambers College of Business and Economics
“I would advise almost any small business to work aggressively to negotiate with suppliers to ensure that prices for their inputs are rising as little as possible. And they need to work to make sure that their output prices are at least keeping up with input prices, all the while ensuring that they do not alienate customers.
“The businesses that are less susceptible to slowdowns in spending are those that provide a good or service that is viewed as a necessity and that does not have a close substitute. If you are a small business owner, hopefully your product fits those categories. When spending is cut, the first items to go are luxuries and items that customers can easily do without.” – John Deskins, Director, WVU Bureau of Business and Economic Research
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