Family business directors generally take the long view relative to their publicly traded counterparts, providing a reprieve to constant market updates and daily market volatility.  Successful family businesses plan for the next generation, not just the next quarter.

However, family businesses cannot simply put their heads down and ignore economic trends outside their family’s industry. Below is a snapshot of five economic indicators we are currently watching for the Family Business Director blog.

COVID-19 Cases and Vaccinations

Cases and hospitalizations continue to decline across the U.S., and as of this writing, 23% of the population over the age of 18 has received at least one dose of a COVID-19 vaccine, with a large portion of vaccines administered to the most at-risk populations.

In addition to the vaccine rollout, family business directors should closely monitor local government ordinances and policy shifts as the pandemic (hopefully) subsides. It is critical to communicate with your shareholders about how these changes affect the operations of your family business, especially if dividends or capital expenditure were curtailed during the pandemic.

Interest Rates

After reaching a nadir in August 2020 (0.52%), treasury yields have ticked upward in early 2021, touching over 1.6%, the highest level since February 2020. Yields rise as prices fall, and yields are currently being driven by inflation expectations and business confidence despite Federal Reserve actions. While inflation is a concern, a steepening of the yield curve should be bullish for economic activity, since such changes often prompt a flight from safety and into riskier assets.

While we will not opine on where rates are going, we do know that they have an impact on the Three-Legged Stool of Family Business: dividends, capital structure, and asset mix. Higher interest rates lead to higher borrowing costs and increased costs of capital. This can directly impact capital structure and a company’s ability to fund shareholder distributions. Family business directors should look at their credit agreements and decide if now is the time to increase leverage at historically low borrowing costs.

Higher interest rates also impact applicable federal rates or AFR. These rates are significant for estate planning because they establish the threshold interest rate for private loans. As we wrote in May, low AFRs present an opportunity to family shareholders in estate planning. The mid-term and long-term rates stand at 0.62% and 1.61%, respectively, for the March 2021 publication. While these are higher than rates observed in 2020, they still represent an opportunity to family businesses.

The Labor Market

Nonfarm payrolls increased 379,000 in February, compared favorably with expectations of 210,000 new jobs.  Matthew C. Klein at Barron’s had a great piece diving into the jobs numbers and highlighted that the numbers were even better than the headline numbers. Unemployment ticked down slightly to 6.2% from 6.3% month-over-month.

However, several of our clients have recently highlighted tightening labor market conditions and a difficult hiring environment. In their view, the current stimulus programs have shrunk the labor force, which may cause businesses to use job placement services and temp agencies which tend to push up labor costs. Talks of increasing the federal minimum wage would also affect many family businesses.  Directors and managers should take another look at their openings and pay rates to ensure key positions are filled and that labor costs expectations implied in their corporate budgets are realistic.

Inflation

Economists continue to be divided on the outlook for inflation. CPI readings have marginally crept upward on a backward-looking basis, but key commodities, including oil, lumber, steel, and chemicals, are seeing steeper price appreciation.  A recent Wall Street Journal article highlights rising costs for a variety of businesses, including a mattress company, plastic storage box retailer, and furniture manufacturer. Family business directors should analyze not just their key input costs but think about the impact of broader inflation on their businesses (customers, wage rates, product pricing) as well.

Sentiment Indicators

As had been the case throughout the pandemic, economic opportunities and losses have not been uniform, with some industries and companies thriving while others are on life support. On balance, though, the  Conference Board’s “Measure of CEO Confidence” hit a 17-year high in February, as business leaders expect to cut fewer jobs and plan to raise employees’ pay.  Consumer confidence also rose across the U.S. in February according to the Conference Board, albeit below lofty readings registered before the pandemic set in during early in 2020.

This contrasts sharply with the confidence of small business leaders, measured by the National Federation of Independent Businesses’ Optimism Index. The January reading stood at 95.0, the lowest level since May of 2020. The NFIB cites the fact that smaller businesses have been more drastically impacted by COVID-19 restrictions and policy, as well as generally higher uncertainty than that reported by larger companies. We understand COVID-19 has not been kind to family businesses. From BanyanGlobal Family Business Advisors’s latest family business survey: “In the current survey results, 66% of respondents report that the crisis has had a significant or minor negative impact on their business, and 22% report a positive impact.”

Family business directors do well to keep a close watch on the sentiment and confidence of their suppliers, competitors, and customers as they craft budgets and investment plans for the coming year and communicate expectations to family shareholders

Bonus: What We Didn’t Cover

You may have noticed that we did not mention the S&P 500. There are considerably more qualified experts to discuss the markets (Randall Forsyth’s “Up and Down Wall Street” is one of our favorite weekly summaries), but we would remind our readers that the stock market is not the economy. While we are admittedly ‘value-tilted’ in our outlook, most observers would agree that stock market activity reflects a wide range of factors and can change course with little warning. Family business directors may be best served to treat Mr. Market as an acquaintance, not a best friend.

Conclusion

While we do not necessarily recommend keeping CNBC on all day in your office, savvy family business directors would be wise to keep their ear to the ground.  Mercer Capital writes quarterly in detail covering numerous indicators, trends, and economic readings (subscription required), and considers this data when working with family business owners. Give us a call if we can help you read the economic tea leaves.