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How we got here and where we’re going: Business outlook 2023

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Let’s start off with a prediction: 2023 will be a flat year. The first 2 quarters will be the tipping point for the rest of the year. The 3rd and 4th quarters of the year will be strong. How did I come up with this prediction?

How did we get here?

Let’s start with the Federal Reserve. The Federal Reserve System is the central banking system of the United States of America. The meetings that the federal reserve has monthly will dictate the Federal Reserve interest rates. The Federal Reserve uses these interest rates to help bring inflation up or down so the economy remains stable.

Inflation: To know where we are, we need to know how we got here. We had between 2.2-2.8% inflation in 2018. In 2020, the federal government dropped the interest rates to almost zero to combat the effects of covid on the economy. Economically, 2020 actually turned into a pretty good year. In 2021 when things started opening back up, inflation started climbing from 2% – 7%. 2022 saw inflation rates that kept growing.

To combat inflation, in March 2022, the Federal Reserve raised interest rates to almost 5%. 2023 will see a tipping point in the first and second quarter to figure out what the interest rates must look like to stabilize the economy. The outlook for the year is very much hinged on how the Federal Reserve meeting goes at the end of January. They could do one of three things: keep it the same, increase rates, or decrease rates. They will likely not decrease the rates after increasing them in December, but they could leave the rates alone. If they bring the rates down or leave them alone in the first 2 quarters of this year, my prediction is that either inflation is under control, or we are in a full-blown recession and the feds are trying to jumpstart the economy. The main thing the feds are trying to avoid is stagnation (things cost more but you’re not making more money). To learn more about Federal Reserve rates, check out Episode 39 “The Federal Reserve Explained” here: https://paarmelis.com/business-by-the-numbers/ or Episode 47 “2023 Forecast and Business Outlook”

Where are we going?

There are a few markets that can give a good indication about the state of the economy and help us understand where it’s going. One market to watch is housing. The housing market affects everyone in some measure, lots of people either own or want to own a house. Right now, it’s in a bit of a weird place. Housing prices and interest rates are (usually) inversely related, meaning if interest rates are up, housing prices are down and vice versa. Right now, the average person is paying twice the amount of money for the same house that they would have a year ago (high interest rates), but it is in the mortgage payments, not the price of the house. The odd thing is we haven’t seen the price of houses coming down. This is due to low supply. This may be cause to think doom and gloom right? Well, another piece of evidence that suggests that the market is still strong is that interest rates for people who already own houses is really good. Also, because of the 2008 recessions, banks are being more understanding towards homeowners in finding alternatives to foreclosure. In 2008, banks sent so many houses into foreclosure that they killed the market. Now, with rules and regulations in place because of covid, as well as a desire to protect their investments, banks are renegotiating deals and working with people. The question of whether the housing prices drop is whether it will be a cause or effect of recession. Another reason that the market is likely okay for now is that there are a lot of banks and “smart money” invested right now. If they were collectively pulling out, there might be reason to worry more.

Another industry to watch, specific to our clients but also very broad and affects almost everyone, is the auto market. They are both up right now in demand. The used car market is still good because supply chain issues caused less production of new cars, driving new car prices up, so people were buying used cars. Supply was very low or non-existent. Banks are scared. Interest rates are rising in the banking area as well and there is much less “credit spread.” To clarify, credit spread refers to an inverse relationship between interest rate and credit score. In the past, with great credit, you could get deals on a vehicle with a decent interest rate and little to no money down. At this point, there isn’t really any spread at all and even people with good credit are paying very high interest rates. Banks are also getting rid of long-term deals and becoming much pickier about what deals they approve.

The over-sticker prices and premiums have stayed high on used cars and the market has stayed steady while inflated. Dealers were selling new cars for way over sticker price and as a result, selling used cars with markups as well. However, now that these markups are going away, people who already carry a marked-up loan on their car are walking way and allowing them to be repossessed.

The true problem is that most Americans are completely broke right now. They don’t have savings and would go into debt for a $1000 payment. This affects auto repair shops because if consumers don’t have the money, they probably will stop opting to fix their cars, even if they want to.

What can you do?

Stay ahead on advertising! Advertising has a lead time on results, meaning advertising in April might not get you results until June. If you don’t advertise until you hit slow months, you’re already too late to affect your current month. If you maintain your advertising budget and start it up too early, you might be wasting some money, but it will still likely produce the desired results. It will probably cost more money in losing work than overspending on advertising. It can be tricky timing, but it pays to get it right.

Watch your numbers closely. Watching trends and averages in this volatile industry can help you predict what’s coming. Take a look at quotes, close rates and ARO. Look at declines. Are people declining work that’s not essential or are they also declining essential work? This can give you clues about where your clients are at and what the future might bring. Another strategy while you’re looking at numbers is to setup some triggers for different actions. For example, “if I have below $80,000 in sales for 2 months, we’re doing plan A. If we’re below $50,000, we’re doing more extreme plan B, etc…” These plans of action can help you survive the tough months. If you’re feeling nervous, become tighter with money, non-essential spending, etc…

All in all, it’s good to remain optimistically cautious. Continuing to watch your numbers, staying ahead on advertising, and keeping an ear to the ground for future developments is the best way to prepare for what 2023 has in store.

Questions; contact info@paarmelis.com

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