How Well is the U.S. Economy Really Doing?

UPDATE (January 1, 2021): The Small Business Pulse Surveys, which the U.S. Census Bureau discontinued in June 2020, resumed in August and are ongoing.

The news — which relies largely on expert opinion, sensational anecdotes, and the performance of stocks — can give us a warped perspective of the real economy. This is true in general, and the problem is particularly acute right now. Amid all this noise, it is wise to periodically turn to authoritative sources of data to get a better sense of what is actually happening. To that end, here are several useful references that provide near real-time snapshots into various aspects of the real economy:

• U.S. Census Bureau Small Business Pulse Surveys — The Census Bureau, known primarily for its once-a-decade census, has a broader mandate to produce data about the American people and economy. In response to the current health crisis, the organization has done a good job of tracking small business sentiment on a weekly basis, providing a good (and moderately reassuring) sense for the state of American small businesses, which are generally defined as manufacturing companies with 500 employees or fewer or non-manufacturing businesses with $7.5 million in revenue. This survey has been discontinued as of the end of June but is likely to resume in August.

• Foot Traffic — This series of charts from SafeGraph shows the impact of the pandemic on foot traffic in the U.S. and provides great perspective on how different fascets of the economy — regions, industries, brands, and even restaurant categories — are recovering. Home Depot, for instance, has witnessed a rise in customer foot traffic since the beginning of the pandemic, whereas traffic at Starbucks is still over 20% off pre-pandemic levels.

• Bloomberg Global Indicators — This dashboard shows 12 regularly updated key economic indicators from around the world. These include PMI (this is an index based on monthly surveys of private sector companies), U.S. employment, and U.S. consumer spending — all of which have an enormous impact on the current state of the economy and its near-term future.

• Department of Transportation Transportation Services Index — This index provides trends in passenger and freight transportation and shows that the pandemic has had a relatively minor impact on freight (down 8% from January) relative to passenger transportation (down 93%). The DOT also publishes a Week in Transportation, which provides updated information on the number of people staying home, the number of commercial flights, and the volume of NYC subway ridership.

• Mergers & Acquisitions — As a business owner, you may be wondering about the current state of M&A transactions. These fell down precipitously (36%) for the first half of 2020 in the U.S. but are witnessing a rise, as captured by a mid-year update by Bain & Company. The report notes that "Market volatility and hard questions about how much consumer behavior has changed in various industries make it difficult to develop conviction around valuations." Still, there's an ample amount of dry powder out there. BizBuySell also has a useful report on the state of deal activity, which shows similar trends for the smallest of businesses.

• Global Trade Update — Finally, Knoema does an excellent job of capturing the state of world trade through its tremendous aggregation of datasets. This provides a long-term view and is not as current as some of the other data, but it provides important context for the U.S. economy, which is the world's largest importer and second largest exporter.

Challenges Predicting the Path of the Economic Recovery

By Will Zimmermann

It is incredibly hard to predict the future, especially the future of the economy. How would I have predicted the economic future earlier this year?

In January 2020, I would have warned of the potential of an eventual correction in the market or a potential recession on the horizon with no mention of a looming global pandemic. After all, the stock market in January was at an all time high and had been consistently gaining for over a decade. The longest bull market on record couldn’t last forever and certainly would leave many firms’ equity dramatically overvalued.

In March, I would have given a starkly different forecast of the economy, for obvious reasons. With the pandemic dramatically touching every aspect of economic life, the impact on the economy would be severe. This forecast would have given cause for alarm about a potential deep recession and perhaps even a collapse in the credit market due to falling corporate earnings.

Writing this in June of 2020, however, my predictions perhaps fall somewhere between the two futures outlined above. I’m more pessimistic than I would have been in January but also more optimistic than I would have been in March. With the release of additional data, the prospects for America’s economic recovery seem more promising and markets have nearly risen to pre-pandemic highs. While such a quick rally is probably premature, markets are also much more oriented to future earnings so this could signal that corporate earnings past the next few months still look relatively healthy.

What does this all mean for the future of small businesses? As can be seen, it’s hard to place a lot of stock in prediction and it will always be severely lacking compared to hindsight. The next few months will have many hopeful and pessimistic headlines. The reality is that these headlines won’t be as helpful as they seem. Businesses will recover when consumer spending returns. Some consumer behavior will eventually return to normal and some of it will be reshaped by the quarantine and pandemic. This will vary from industry to industry and determine the future prospects of many small businesses.

See Also:

• Predicting the future is hard, particularly when it comes to complex systems like the economy

• Near real-time data on the state of the economy - here and here

Can You Sell A Business in Times Like These?

The answer is yes — but with certain caveats.

As of this writing in early-May, the length and ultimate severity of the current public health crisis remain unknowable. However, the impact that it has had on our economy over the past two months leaves no doubt that it will continue to have a major impact on business transactions, just as it has impacted everything else.

For owners interested in selling their business, there the prospects are not as grim as they may seem. For one, many long-term investors such as those backing Eagle Peak Capital Partners take solace in the track record of the American economy, which has its ups and downs but has proven to be resilient over time. Warren Buffett spoke to this point during his virtual annual meeting this past weekend. Additionally, there is still a large amount of capital that has yet to be invested, including almost $1 trillion available for buyouts. This distinguishes the current crisis from the 2008-09 Global Financial Crisis, as does the continued availability of debt. That's the good news.

Yet there have been relatively few business transactions of late as many buyers take a "wait and see" approach. Here are some of the reasons why things have slowed down:

• It's not easy to determine a fair value — This is a challenge in the most 'normal' of times (see related post), but it is particularly challenging right now given the wide range of potential economic outcomes, which range from a fairly quick recovery to a prolonged depression. Values from earlier this year are no longer valid, as they do not account for the increased risk present today. Additionally, buyers will be sizing up businesses in a different way than they had previously, focusing more of their attention on metrics such as cash reserves than on growth potential than they had prior to the crisis. Over time, the process of price discovery will unfold, and the market will shed light on reasonable valuations. This happens quickly in the stock market but will likely take a period measured in months when it comes to private companies, and in the interim will make it more challenging (though not impossible) for sellers and buyers to agree on a price.

• Risk — Just as sellers must agree to a reasonable price, they will also face the additional challenge of agreeing on how to share risk, so the terms of deals in this new environment may be different from those involving deals that occurred just a few months ago. These largely come in the form of downside protection for buyers and take the form of provisions like earn-outs and seller notes.

• Mindshare — Many investors and banks are spending much of their energy managing the businesses and loans they currently oversee. This alone does not preclude a deal from occurring — after all, deals are how they make money — but it means that the transaction will have to be that much more appealing to gain their attention.
  

Eagle Peak Capital Partners and its investors remain committed to acquiring and managing a single, great business, just as it was prior to the crisis. Please visit eaglepeakcap.com/resources for additional seller resources and feel free to reach out to rknauer@eaglepeakcap.com or fill out the form below if we can be of help. Thanks, and stay well!