7 major economic risks facing small businesses in 2024

The outlook for the U.S. economy is looking increasingly brighter.

Economists at Goldman Sachs and Bank of America are predicting that the US will head for a so-called soft landing in the new year, as the Federal Reserve's interest rate hike campaign is likely to tame inflation without triggering a recession. This optimism was further bolstered last week when the Fed suggested it would keep interest rates on hold and potentially cut them three times in 2024. Fed Chairman Jerome Powell struck a dovish tone in his press conference, sparking a rise in the stock market. The S&P 500 is nearing an all-time high, while the VIX, known as Wall Street's fear gauge, is at its lowest since before the pandemic.

That's quite a turnaround from where we are in early 2023. Last year was supposed to have what economist Megan Green, a senior fellow at Brown University's Watson Institute for International and Public Policy, called “the most anticipated recession in U.S. history.” At one point, the probability of a recession reached a staggering 100%, according to Bloomberg Economics projections. That consensus downturn never materialized, even as entrepreneurs complained about the state of the economy and their businesses.

“Everyone's been surprised by how well the economy has held up through 2023. I think even people who weren't expecting a deep recession have been pleasantly surprised by how well growth, consumer spending and the labor market have held up,” said Brett House, a professor of economics at Columbia Business School. “The only thing that hasn't been consistent with the surprisingly good performance is the surprisingly weak consumer sentiment.”

This economic upheaval is an important warning. Though optimism is taking hold, entrepreneurs need to be prepared for any risks lurking beneath the rosy surface of slowing inflation and robust job growth. Even Powell warned that “it is too early to declare victory, and risks certainly exist.” Wells Fargo Economics echoed the warning in its 2024 outlook. “The outlook for the U.S. economy over the next year or so is far from bright,” economists Jay H. Bryson, Nick Bennenbroek, Jackie Benson and Shannon Seely Grein wrote. “While a full-blown economic crisis may not be on the horizon, storm clouds are likely on the horizon for the time being.”

Here are some of the biggest financial risks entrepreneurs should prepare for in the new year.

Inflation is easing. The consumer price index is at 3.1% year-on-year, well below the 40-year high of 9.1% in June 2022, but the index is above the Federal Reserve's long-term target of 2%, making it one of the most pressing concerns cited by small business owners. And as history shows, fighting inflation is difficult. Chairman Powell stressed at the press conference that even recent positive news on the inflation front does not mean the fight against rising prices has been won. “Inflation remains too high, sustained progress toward lowering inflation is uncertain, and the path forward is uncertain,” he said.

In its outlook, Well Fargo Economics noted that sustained inflation and the interest rate hikes needed to contain it remain a risk. “The battle against inflation has not yet been decisively won, so it would be premature to claim that the economic storm is over,” the bank's economists wrote.

Economic growth has remained strong this year despite the interest rate shock. Third-quarter gross domestic product (GDP) grew 4.9% year-over-year, the fastest growth since the fourth quarter of 2021. But some economists expect the pace of growth to slow or halt altogether in the new year due to rising interest rates. Wells Fargo Economics expects real GDP growth to be “subpar at best,” while Vanguard sees the outlook for a moderate deterioration.

House also expects growth to flatline next year, and he attributes that in part to policy, as the tailwind from pandemic stimulus measures fades, he explained. Moreover, the Biden administration's large-scale industrial policy or targeted measures aimed at shoring up specific sectors of the U.S. economy, such as the Contract with Inflation Act and the Semiconductor Act, are unlikely to be replicated on the same scale.

Over the past year, entrepreneurs have had to contend with an increasingly tough credit environment. Nearly a third of banks reported tightening lending standards for businesses with less than $50 million in annual sales in October, and 87.5 percent of banks said their outlook was poor or uncertain, according to a Federal Reserve survey of senior loan officer opinions. Meanwhile, large banks with more than $10 billion in assets approved just 13 percent of small business loans last month, according to the latest Biz2Credit Small Business Lending Index.

This situation is unlikely to change in the new year: “Real interest rates are at their highest levels since pre-2008 and will begin to have an increasingly adverse effect on financial and credit conditions,” House said.

The return to the office has stalled this year as most U.S. companies have settled on some degree of remote work, according to data compiled by hybrid-work software company Scoop Technologies. That's bad news for office buildings, and Chris Clark, an assistant professor of economics at Washington State University, warned that a potential crash in commercial real estate could pose a big risk to many people, not just landlords.

“We're going to see some commercial real estate firms go under and suffer losses,” Clark said. “The concern is whether this becomes a systemic problem big enough that it affects the whole economy.”

If such a downturn spreads from commercial real estate to other sectors of the economy, smaller banks that hold large portfolios of these commercial mortgages would be the first to be affected, said Rajeev Dhawan, director of the Center for Economic Forecasting at Georgia State University.

One risk that's always top of mind for economists is confrontation between the world's largest economies: How the US and China manage tensions, from trade to Taiwan, will continue to have an impact not just on the US economy but the global economy as a whole, House said.

The only solace on the China front may be time itself: Clarke cites military conflict with China as the biggest threat over the next decade, but cautions that he's not too worried about a direct escalation in 2024.

In a year of venture capital slowdown, AI startups received a quarter of all funding, and Goldman Sachs Research predicted that these innovations in AI could boost global GDP by 7% over the next decade, or about $7 trillion. But this potential growth is not without risks. According to Politico, OpenAI's internal rules include provisions for how the company would operate in a hypothetical future where AI has completely upended the economy and currencies no longer have any real value.

For Joe Davis, chief global economist at Vanguard, artificial intelligence remains a big trend that spans all sectors of the economy. “I think the question we all face is: will there be too few workers in the future, or will there be too few jobs?,” Davis said. “The industry doesn't have the answers. We have opinions, but we don't have the answers.”

Economists say one of the biggest economic risks going forward is uncertainty itself. strangeIt refuses to follow typical business-cycle trendlines. In that environment, even economists can have difficulty articulating the most pressing risks, Dhawan said. “I don't think we're back to normal yet,” he said. “We're still figuring out how we're going to work and where we're going to live in a post-pandemic economy.”