What Business Confidence Indicator Tells about Our Economy
The Business Confidence Indicator (BCI) surveys small businesses and corporations to gauge future companies’ sentiment about business cycles and future economic activity.
The rise of business confidence is often closely correlated to the growth of GDP and job opportunities. As the graphic below shows, this indicator not only serves as a reflector of the actual economic growth, but moves ahead of changes indicating a possible upward or downward trend in future activities. Since the U.S. economy gradually recovered from the pandemic as vaccines became more widely available, this index hit an all-time high of 65 this March, meaning that businesses felt they had great prospects for their future. When companies feel more confident about their ability to grow and thrive, they are likely to create more job openings, produce more goods or services, and increase business investment spending. As a result, the unemployment rate can fall as we see in the U.S. right now.
However, regardless of the fact that the rate could be lowered because some people stopped looking for jobs altogether and were then not counted as unemployed, the labor market is facing another challenge as it shifts back to normal: worker shortage. Many businesses have reported difficulty in finding employees, especially local stores that offer relatively low wages. According to the Department of Labor earlier in August, there are about 1 million more positions available than people looking for jobs. Under this situation, even though businesses have positive outlooks about their financial conditions and the current market, their expectations may not be fulfilled when these positions are not taken.
According to CNBC, the third quarter survey finds that labor shortage has suppressed small business confidence as most owners cannot find qualified workers, expecting a slowdown in new job creation. Thus, companies have to implement multiple strategies in order to entice people back into the workforce, including offering bonuses, raising salaries, and providing more benefits. At the same time, businesses struggle with higher maintenance costs and supply chain disruptions as results of rising inflation.
In comparison, when the business cycle goes downward and the economy shrinks, as happened last year when the COVID-19 pandemic hit the U.S., businesses are among the first to sound the alarm. Starting last March, as economic activities slowed down nationwide, the steep decline in business confidence was also followed by a sharp decrease in consumer spending, employment rate and the country’s GDP. Based on evidence above, by monitoring business confidence levels, we will become better informed about the overall health of the economy and the future market.
