Economic Perspective: What Do Businesses Worry About?

MARY WALDEN:

“Today’s program looks at business worries. Mike, there are many concerns about the ability of the economy to continue expanding. Obviously people worry about their jobs and incomes, but what do businesses worry about, and how could those worries affect the direction of the economy?”

MIKE WALDEN:

“Well of course businesses are focused on making enough revenue to cover their costs with some left over for profits, and average profit rates are not as high as many people think. Some are around three to four percent. And so right now businesses are worried about three things. Number one, the rising cost of labor. As the unemployment rate has come down, also the accessibility of labor in that regard.”

“They’re also worried about tariffs on imports, imported things that they are using to make their products particularly tariffs on Chinese imports. And thirdly, they’re worried about supply chain. They are worried about if they can’t buy things from China at the rate they want, where else can they buy them. And in fact some companies have been trying to change that supply chain.”

“Now this all rolls into one ball in that businesses ultimately worry about the effect of all of these factors on their margin or their profit rate, and if their profit rate goes down that will mean they will likely have to cut back. They’ll have to cut back their production which means they have to cut back jobs or wages they pay to the workers. If that happens then workers don’t have as much money to spend. Consumers, of course, are the dominant factor in the economy so if consumer spending goes down we could see this all roll into a big recession.”

“So right now I tell people to watch the business sector, watch what businesses are doing. If they appear to be cutting back, laying off workers, that’s not a good sign for the future of the economy.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.