Industry Trends

The Economy Is Still Growing—and That’s a Good Thing, Right?

Jan 26, 2023 • 5 min read
economy grows while stock market falls
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      Talk about mixed messages. The economy grows … and the stock market sinks?

      Back in late December 2022, that was the report from CNN: “gross domestic product…grew at an annual pace of 3.2% between July and September, above the 2.9% estimate from a month ago.” But the result of that great news was a drop in the stock market.

      economy vs the stock market
      Why would the stock market fall at the same time as the economy? We explain why and how — and what’s really happening.

      How can that be? It turns out it all comes down to interest rates.

      Small Business Growth, the Economy, and Inflation

      The December report on gross domestic product (GDP) contrasted economists’ hopes and maybe even their predictions that the economy would slow its growth and stabilize with rising interest rates.

      But isn’t growth good? That’s where things get a little confusing.

      Right now, the Fed really really wants to curb growth to stave off inflation, which, BTW, has dropped. So it keeps tinkering with interest rates. You already know that the Fed increased interest rates 7 times in 2022 in an attempt to curb spending, with the most recent increase—0.50%— happening on December 14.

      But reports are indicating that consumers and businesses didn’t quite get the message and continued to spend despite the increasing interest rates in 2022, and spending is linked to demand which drives up inflation. Looking at businesses, the CNN article notes that “a recent survey of chief financial officers found the current level of interest rates have not impacted their spending plans.” 

      It makes sense. Businesses of all sizes want to grow. Small businesses, for example, have spent the past 3 years weathering an unpredictable, to say the least, economy. Inflation or not, a growing economy feels like a welcome change. 

      And, apparently, consumers are no different. CNN reported in that same article that “Consumer confidence improved in December [2022] according to a survey by the Conference Board, reaching the highest level since April.” Customers are ready, willing, and able to engage in the economy, growing small businesses’ bottom lines as a result.

      Business Growth Meets Cautious Investors

      To most of us, a growing economy feels like the right direction. But the way economist Paul Hickey of the Bespoke Investment explained it to CNN, “The [economic] data was stronger across the board, and if there’s anything the Fed does not want to see these days, it’s better than expected data.”

      This leads us to Wall Street, where investors take a slightly different view than consumers and Main Street. While smaller businesses have smaller profit margins and therefore operate more in the here-and-now, investors and their deep pockets take a bigger picture view—what happens in the future?—before plunking their money down. Investopedia explains it like this:

      When interest rates rise, it also makes it more expensive for companies to raise capital. They will have to pay higher interest rates on the bonds they issue, for example. Making it more costly to raise capital could put a damper on future growth prospects as well as near-term earnings. The result could be a revision downward in profit expectations going forward as rates increase. 

      In other words, investors are buying into what they think will happen if interest rates rise again, which the Fed has vowed will continue until inflation is in check, which, while it’s improving, still isn’t back to its desired 2-3%. Investors take the view that higher interest rates could reduce the profits of the businesses investors are putting their money into. So those investors pull back.

      Your Next Move?

      So where does that leave Main Street? Do you follow the lead of businesses and consumers and continue to grow? Or do you step in line with investors and pull back? 

      The final quarter of 2022 is still under analysis, asset managers Schroders have released some preliminary data, noting that “the Fed’s final rate hike of the year was indeed a pared back 50 basis points (bps) rise after four consecutive 75 bps tightening moves. The policy rate is, however, expected to continue to climb in 2023.” Translated that means interest will probably still increase in 2023 (which could make now a good time to borrow) but likely at a slower pace than in 2022.

      But the answer to what should you do, well, that’s complicated. Pull back if you feel it’s right for your business or where it makes sense. But, if you have the opportunity to grow your business and the numbers work out, it simply may not matter how the Fed feels.

      The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
      About the author
      Rachel Mennies

      Rachel Mennies is the owner of The Little Book, LLC, a small business that provides writing and editing services to individuals, nonprofits, and businesses of all sizes. At last count, Rachel's writing and editing skills have helped shape nearly 500 articles and blog posts for Lendio.com.

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