Main Street Macro: Wall Street threw a tantrum, but Main Street carried on

The deep sell-off that gripped Wall Street two weeks ago was short-lived. The volatility was triggered by a Bank of Japan rate increase that drove up the yen and rattled global markets. In the U.S., weaker-than-expected jobs data piled on, stoking fears of a recession and extending the market downturn.

But by Friday, Aug. 9, the S&P 500 Index had all but returned to its closing level from the Friday before. A week of losses was erased.

The speed of Wall Street’s dive and recovery is at odds with the slowness of data that signal changes in the real economy.

Main Street establishments move at a slower pace than Wall Street’s market makers, speculators, and investors. And Main Street employment trends sometimes can be drowned out by the cacophony of monthly jobs data.

In fact, the Main Street economy continues to grow. While Wall Street licks its wounds, let’s take a look at some small business data.

High-propensity start-ups are increasing

Over the last four years, the Census Bureau has documented a surge in new business applications.

Between June 2020 and June 2024, new business applications averaged 440,799 a month, up from just 269,913 a month in the four years preceding the pandemic.

About a third of those applications are from high-propensity businesses. Census defines high-propensity businesses as start-ups with a likelihood of becoming employers with a payroll. These are Main Street’s job creators.

In the second quarter of 2024, high-propensity business applications were up 28 percent from the second quarter of 2019. 

Banks are lending

One thing Main Street and Wall Street can agree on is the benefit of low interest rates. Cheap borrowing cuts costs and increases demand for loans.

In tandem with Federal Reserve interest rate increases, banks have been tightening lending standards for borrowers of all sizes. But while large companies can obtain financing in the stock and bond markets, most small employers are dependent on bank loans to grow their businesses. 

The Federal Reserve’s Senior Loan Officer Opinion Survey last week was a light at the end of a long, dark tunnel for these small businesses. It found that the share of U.S. banks that tightened standards on small business loans fell to 8.2 percent in the third quarter, down from 19.7 percent in the second quarter and the lowest share since 2022.

Lending standards are likely to ease further when the Federal Reserve cuts its benchmark interest rate. That should tamp down financing costs and enable Main Street to continue its hiring growth.

Mom-and-pops are still hiring

The ADP National Employment Report has tracked hiring by small employers since 2010. In the first seven months of 2024, establishments with fewer than 20 employees hired 133,000 people. That’s a tremendous downshift in hiring from the same period a year ago, when these employers created 532,000 jobs.

One reason small employers hired aggressively in 2023 was because they had had difficulty competing with large companies in 2021 and 2022, as the economy recovered and demand for labor took off. As larger employers slowed hiring in 2023, smaller ones stepped in, aggressively rebuilding headcount lost during the pandemic.

Main Street hiring now is back to its normal pre-pandemic pace. The smallest establishments have created 133,000 new jobs so far this year, up from the 128,000 jobs they added during the first seven months of 2019.

What’s more, labor costs are returning to pre-pandemic levels. Median annual pay growth at small employers peaked in September 2022 at 5.6 percent for workers in the same job for a year or more, the job-stayers we track in our monthly Pay Insights report.

And while small employers tend to increase pay more slowly than large companies, they’re still growing wages faster than the current pace of inflation. In July, pay for job-stayers at small employers was up 4.1 percent year-over-year.

My Take

While Wall Street is quick to react to data signals, Main Street responds to on-the-ground economic conditions, which take longer to decipher.

And instead of focusing on theory and historical regularities, the way economists do, small business owners ask questions: Is it easier to get a loan? How quickly can I add staff? Am I seeing less turnover?  Are my labor costs rising faster than revenues?

These questions take longer to answer, and those answers provide a more enduring sign of the economy’s trajectory than wild stock market swings.

The Week Ahead

Monday: Wall Street will have lots of data to react to this week, starting with budget estimates from the Treasury Department.  At a record $35.1 trillion, the national debt is the elephant in the U.S. economy.  

Tuesday: The Producer Price Index measure of inflation from the Bureau of Labor Statistics often rhymes with consumer inflation. If it differs this week by being significantly higher or lower, it could be a leading indicator of the pace of consumer price increases to come.

Wednesday: With all eyes on September’s meeting of Federal Reserve policymakers, the Consumer Price Index measure of inflation, also from the BLS, will be the most important indicator of the week, or maybe even the year.

Thursday: After disappointing in June, retail sales data for July from the Census Bureau will help economists decipher whether consumer spending is still supporting growth in the third quarter.

Friday: Falling mortgage rates have been one bright indicator for Main Street lately. Residential construction data from Census might bring more good news that the housing market is starting to right itself after a streak of low inventory and high interest rates.