Click here to get this post in PDF
The US economy has taken a roller-coaster ride for the past two years. After its sustained growth, it took a nosedive as the pandemic caused massive disruptions. Presently, it is geared toward another recession, alarming consumers and policymakers alike.
As an aspiring entrepreneur, starting a business is a significant milestone. But it can be challenging amidst volatility and uncertainty. Chances are, your money, time, and effort will go down the drain.
Nevertheless, you can do something to weather the rugged market landscape. Here are some vital indicators to observe before entering the business sector.
Inflation and deflation are a part of economic growth and downturn. But there’s a point when consumers and producers can no longer take the rising and falling prices. Inflation may take place when there’s an excessive market demand that can lead to shortages. We call it demand-pull inflation. The other trigger is the increased cost of production. Often, it happens when companies have to import inputs during unfavorable ForEx conditions. Wage rate hikes may also become a primary driving force. Both of these situations refer to cost-push inflation.
Put simply, inflation and deflation happen during an imbalance between the money supply and the availability of products and services. Therefore, prices must stabilize purchasing power and production level to maintain market equilibrium.
The US has registered an inflation rate of 7.1% for November 2022, a notable decrease from the 9.1% peak in June. Despite this, it remains way higher than pre-pandemic levels, leading to bleak projections.
As a business owner, you must scrutinize your operating capacity. Check your available raw materials and labor and compare them to outputs. It will hint at your operational efficiency, so you will know the adjustments to make to improve it. Hence, you can set a flexible price and manage revenues and margins.
Interest rates have a direct relationship with inflation. During sluggish economic conditions, prices are lower to entice customers. As a result, interest rates decrease to attract borrowings and investments. We have seen the same scenario in the US economy in the last two years. Interest rates dropped to almost zero in 2020, encouraging borrowers and investors.
This year, inflation has already stretched and sprawled faster and further than expected. In response, the Fed started implementing a series of interest rate hikes earlier this year. As a result, estimates show it may reach 4.5-5% or beyond that range.
Given this, you must keep watch of your financial capacity. Do you have enough cash to run a business? It may not be profitable in the first year, so you need cash to sustain it. You may opt to borrow. But remember, interest rates are skyrocketing, and so are borrowing costs.
Gross Domestic Product
Gross Domestic Product (GDP) is the cash value of domestic production and consumption. GDP changes also influence inflation and interest rates. As a potential business owner, you must check it every quarter and track historical data. That way, you can assess its performance and the factors affecting it, such as seasonality. You will have an idea about your business performance if you pattern it with GDP.
The unemployment rate is a primary macroeconomic indicator. It affects the capacity of workers to look for another job or demand higher wages. During periods of high unemployment, there is a higher labor supply. It may be more challenging to get hired or ask for higher salaries.
Unemployment can affect your business in two ways. First, higher unemployment can mean more employees are willing to work for you. You may also influence wages due to increased competition among job applicants. Hence, you can manage your labor expenses better.
Second, unemployment can help you measure the purchasing power of customers in your area. Higher unemployment means lower purchasing power, which may reduce demand and price. And while it has a mixed market impact, having a full grasp of it can increase your flexibility.
Supply And Demand
Unlike the previous items, supply and demand are less of a macroeconomic indicator. It is an integral concept in studying the economic aspect of your business. Once you understand it, you can set strategic wages and competitive pricing.
What separates a business from its peers is its strategies. The doability of a business idea may depend on the type of business ownership. You may want to go solo but need help if you lack finances and skills. Sole proprietorships and partnerships have higher autonomy compared to corporations. Limited liability companies (LLCs) are the most flexible. Some aspects include ownership, business decisions, liabilities, and taxes.
Moreover, LLCs continue to evolve as digital transformation speeds up. Many groups create a group to achieve a common goal or generate fat returns. Decentralized Autonomous Organizations (DAOs) have become more prolific in recent years. If it suits you, you may pattern your business ideas with a DAO.
However, DAOs can become more complex than conventional businesses. Thankfully, plenty of business experts can help you from business planning to execution. Click here to learn more about DAOs and get more lucrative business ideas.
Starting a business today can be riskier due to economic volatility. Planning and application can be tedious due to the various factors to consider. Yet, understanding the impact of external factors can help you create effective strategies. As a result, you can shield your business from disruptions and maneuver it with prudence and ease.
You may also like: Essential Do’s and Don’ts of Financing Your Startup
Image source: Depositphotos.com