ReportWire

Tag: Economic outlook

  • Finding Calm in Chaos: How Leaders Can Thrive Amid Industry Uncertainty

    We are living through one of the most volatile periods in modern business. Global uncertainty has nearly doubled since the mid-1990s, and the tech sector feels this turbulence more acutely, with top tech companies having experienced 40% higher churn from 2000–2023 than other industries.

    Executives today face disruption from every angle: generative AI reshaping business models overnight, shifting regulations, geopolitical tensions fragmenting markets, and intense competition for talent. Anxiety is widespread—but uncertainty reveals more about leadership than stability ever could.

    The companies thriving through uncertainty aren’t those with perfect foresight. They’re the ones that practiced navigating volatility before the storm hits—building organizational muscle memory that transforms disruption into competitive advantage.

    Map talent to value creation

    In volatile times, the difference between thriving and surviving comes down to whether your best people are positioned to drive the most value.

    Most executives focus on C-suite talent allocation, but true competitive advantage lives in the team leads, product managers, and engineers doing the hands-on work. These are the roles where decisions get made hundreds of times per day—where product features get prioritized, customer problems get solved, and code gets deployed.

    When the landscape shifts, you need your strongest players closest to the action. I’ve watched companies lose ground not because their strategy was wrong, but because their best execution talent was trapped in legacy projects while competitors moved faster.

    The companies getting this right are ruthless about talent reallocation. When market conditions shift, they move their strongest teams to the opportunities that matter most, rather than waiting for annual planning cycles.

    Tony Jamous

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  • Amid Government Shutdown ‘Fog’, Employers Are Scrutinizing Private Data for Economic Clues

    One of several effects of the longest government shutdown in history that’s clouding our economic outlook is the shuttering of the agencies that provide economic and employment data. With that flow of information closed since September, private sector observers have stepped up with their own statistics to offer business leaders a better idea of where things are headed. But no end in sight for the federal work stoppage, the job figures released this week by a variety of companies may actually create more confusion than clarity.

    This week the government shutdown entered its second month, leaving legions of federal workers unpaid, disrupting services from air traffic control to food stamp distribution. It also continued preventing the Bureau of Labor Statistics from producing its regular monthly jobs reports. The agency’s last official data in September showed companies had pinched off recruitment to almost nothing beyond replacing departing workers. That cautious staffing strategy by businesses that have hesitated to hire since spring amid economic uncertainty meant a monthly average of only 26,750 positions were created between May through August, when just 22,000 openings were filled.

    Since that time, companies have had to rely on statistics and analyses from private sector actors as they try to figure out how the labor market and broader economy are performing. A new wave of data released this week may leave some business leaders more cross-eyed than clearsighted.

    On the positive side, payroll services company ADP said that its customers’ data indicated U.S. businesses increased headcounts by 42,000 in October. That number was a decided improvement over the 34,000 net job losses ADP reported in September, after a decrease of 3,000 in August.

    But it’s still a fraction of the average 180,000 hires per month in 2024, and even less than the 64,500 monthly average between January and May. Moreover, relatively robust hiring in the healthcare, transport, and utility sectors compensated for anemic recruitment otherwise.

    “Private employers added jobs in October for the first time since July, but hiring was modest relative to what we reported earlier this year,” said ADP chief economist Nela Richardson, announcing the latest monthly estimate.

    And that was the good news.

    Rival payroll services and staff management company Gusto released its October employment data for small businesses, when 5,900 jobs were lost. Worse still, that extended the decline in recruitment since a recent peak of 57,400 new hires in July, which decreased to around 19,000 in September before dipping into the red last month.

    “This marks a continuation of the broader hiring slowdown we’ve observed since the post-pandemic hiring surge of 2021, when small businesses were adding an average of 170,000 net new jobs each month,” the October 2025 Gusto Small Business Jobs Report said. “Notably, the overall pace of both hiring and terminations has slowed dramatically over the past two years — the so-called ‘Great Freeze’. Hiring for small businesses peaked at nearly 3.4 million per month in January 2022, and have since fallen by 37 percent since then.”

    Homebase, another competitor in payroll and workforce management services, used different statistics to paint the same picture of a weakening labor market.

    Its recently released “Main Street Health Report” found that what it terms “workforce participation” at the over 100,000 small businesses it studied had decreased by 2.9 percent in October — a slight improvement over the 3.5 percent headcount decline in September. That came as hiring slipped 5 percent compared to October 2024, with business activity sluggish or dropping in all sectors apart from hospitality.

    So, what should business leaders make from those different, yet largely overlapping views of company headcounts remaining flat or shrinking slightly in October?

    According to Appcast chief economist Andrew Flowers, amid the “fog” created by the absence of reliable government data during the shutdown, the best thing businesses owners can do is use the available “headlights” of private sector statistics to carefully steer themselves down the road. That may be unnerving, he said, but less dangerous than pessimists might think.

    “What data we do have in hand suggests a continual labor market slowdown, but not the bottom falling out,” Flowers said in emailed comments to Inc.

    But he also pointed to recent mass layoffs announced by Amazon, Target, UPS, IBM, and other corporations. Following those big cuts, there may be a risk that business leaders deprived of official economic and employment data could defensively replicate the headcount cutting example of bigger companies.

    “This happened in early 2023, mind you — when bad vibes about jobs were disproportionate to the underlying data,” Flowers said. “This time around we don’t have the data to guide us. (But) underlying consumer spending and business investment has been surprisingly resilient. Real-time GDP tracking estimates show Q3 to be quite strong.”

    Meaning employers, staff, and job seekers alike would be wise to buckle up and hope for the best as they make their way through the fog.

    The early-rate deadline for the 2026 Inc. Regionals Awards is Friday, November 14, at 11:59 p.m. PT. Apply now.

    Bruce Crumley

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  • The Economy Seems Uncertain. Here’s Why Entrepreneurs Remain Optimistic

    Although small company workplaces likely face margin pressures from higher costs generated by import tariffs, they’re still largely upbeat, characterized by owner optimism about their business outlook. Nevertheless, recent data shows that many entrepreneurs are using the same cautious hiring strategies as bigger firms, slowing recruiting to a crawl nationwide.

    That mix of entrepreneur confidence despite lingering concerns over the broader outlook for economic growth was captured by payroll and staff management service provider Gusto. Its recent “State of Small Business 2025” report surveyed 1,148 owners of midsized and smaller companies, most of whom remained upbeat despite the impact of import tariffs, rising costs, and higher interest rates that have made borrowing prohibitively expensive. Indeed, an impressive 87 percent of respondents said their businesses met or exceeded performance expectations this year, including 51 percent of participant who said they’d fared better than anticipated.

    Still, entrepreneurs were divided in their views of the wider economy, with exactly half of respondents describing themselves as either somewhat or very pessimistic about its direction. By contrast, only 28 percent of participants said they were somewhat or very optimistic about the economy, while 21 percent were undecided.

    Small business owners were even more tightly split about the effects of tariffs. Half described import duties imposed this year as having had more negative consequences than previously existing duties did. Surprisingly, the other 50 percent of participants said the recent levies had generated no additional impacts beyond those of previous customs levies, or had even produced positive changes.

    But there was another way the tariffs colored entrepreneurs’ perceptions. Eighty-five percent of small company owners who voiced negative views of the economy said tariffs had influenced that view, while 65 percent of respondents who said their businesses had underperformed their expectations blamed import duties at least partially for that.

    “(T)he costs of tariffs are felt by many small business owners, who told us that tariffs are creating a clear drag on margins and forcing them to rethink supply chains and possibly scale back expansion plans,” the Gusto report said. “What began in 2025 as uncertainty is now manifesting at the end of the year as real economic costs.”

    In addition to tariff costs prompting some entrepreneurs to rethink growth plans, wider doubts about the economy have also led many small business owners to embrace the minimalist hiring patterns adopted by bigger companies since the first quarter of the year.

    Around 40 percent of owner-respondents who employ one person or more said they had hired no additional new staff this year. That was often described as a check on rising costs, a precaution that many entrepreneurs attributed to tariffs and inflation. Nearly 60 percent of 2025 Gusto survey participants said higher prices had had a negative effect on their businesses — compared to 49 percent last year — leading many to become wary of adding more staff and salary expenses.

    “The smallest businesses tend to keep their headcount steady over time and hire only when an employee leaves,” the Gusto report said, noting that aligned with other aspects of national employment strategies. “The low rate of hiring among those firms suggests more workers are staying put, which is consistent with broader trends in the labor market.”

    Small business owners who have been hiring said they often filled customer-facing jobs, or other work requiring human skills that artificial intelligence applications can’t replace.

    “(A)s price increases have stressed the budgets of both businesses and consumers, small businesses who can’t easily raise prices may be investing in exceptional customer service to retain and attract customers,” the Gusto report said. “Finally, customer- and client-facing roles may be more resilient to replacement by today’s AI tools, as most of their value comes from a ‘human touch’ AI can’t replicate.”

    Another concern a majority of entrepreneurs voiced are the still relatively high interest rates that make borrowing money through bank loans too expensive. As a result, nearly 60 percent of survey respondents said they turned to alternative forms of external financing this year, with owners’ drawing from personal savings or using business credit cards cited as the most frequent forms.

    Contrary to popular belief, however, those funds were often used just to keep existing business running, and not to finance expansion plans.

    “It’s a popular assumption that small businesses primarily seek financing to grow their business,” the Gusto analysis said. “However, our survey shows financing is more often used to cover everyday expenses. This year, entrepreneurs have been most likely to use external financing to cover short-term costs or buy equipment and tools. Just 16 percent of small businesses that have received external financing this year have used it to invest in long-term growth.”

    Bruce Crumley

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  • L.A. County chief executive got $2-million settlement after Measure G fallout, records say

    Fesia Davenport, Los Angeles County’s chief executive officer, received a $2-million settlement this summer due to professional fallout from Measure G, a voter-approved ballot measure that will soon make her job obsolete, according to a letter she wrote to the county’s top lawyer.

    Davenport wrote in the July 8 letter, which was released by the county counsel through a public record request Tuesday, that she had been seeking $2 million in damages for “reputational harm, embarrassment, and physical, emotional and mental distress caused by the Measure G.”

    Under Measure G, which voters approved last November, the county chief executive, who manages the county government and oversees its budget, will be elected by voters instead of appointed by the board. The elected county executive will be in place by 2028.

    “Measure G is an unprecedented event, and has had, and will continue to have, an unprecedented impact on my professional reputation, health, career, income, and retirement,” Davenport wrote to county counsel Dawyn Harrison. “My hope is that after setting aside the amount of my ask, that there can be a true focus on what the real issues are here – measure G has irrevocably changed my life, my professional career, economic outlook, and plans for the future.”

    The existence of the $2-million settlement, finalized in mid-August, was first reported Tuesday by LAist. It was unclear then what the settlement was for.

    Davenport, a longtime county employee, was appointed chief executive in 2021.

    Under the terms of the settlement, Davenport cannot sue the county, including for “any claims arising out of the facts and circumstances surrounding the enactment of the ballot proposition known as ‘Measure G.’ ”

    Davenport began a medical leave last week and told staff she expects to be back early next year. She did not immediately respond to a request for comment on the settlement.

    Davenport’s Aug. 12 letter stated that other department heads had received significant payments upon departure. She noted the prior chief executive officer, Sachi Hamai, had received $1.5 million. The letter also makes an apparent reference to Mary Wickham and Rodrigo Castro-Silva, mentioning the former county attorneys by their last names.

    Wickham received about $449,000 in severance pay and Castro-Silva received $213,000, according to records obtained by The Times.

    “My circumstance is different in that I am not seeking to leave, and I have suffered damages, through no fault of my own,” she wrote.

    Supervisors Lindsey Horvath and Janice Hahn first announced Measure G in July 2024, branding it as a long-overdue overhaul to the county’s sluggish bureaucracy. Under the charter amendment, the number of supervisors increased to nine and the county chief executive will now be elected.

    On Aug. 12, 2024, a few weeks after the announcement, Davenport wrote a letter to Horvath saying the measure had impugned her “professional reputation” and would end her career at least two years earlier than she expected, according to another letter released Tuesday through a public records request.

    “This has been a tough six weeks for me,” Davenport wrote in her letter. “It has created uncomfortable, awkward interactions between me and my CEO team (they are concerned), me and other departments heads (they are apologetic), and even County outsiders (they think I am being fired).”

    Horvath’s office did not immediately respond to a request for comment.

    The position of elected CEO was by far the most controversial part of Measure G. Supporters said that making the chief executive elected rather than appointed would bring more accountability to one of the county’s most powerful posts. Opponents warned it would consolidate too much power with one person and bring politics into a fundamentally bureaucratic position.

    Rebecca Ellis

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  • Small Business Confidence Just Dropped for First Time in 3 Months

    Small business owners remain worried about the same things that top the monthly survey used to create the NFIB Small Business Optimism Index, which slipped 2.0 points in September to 98.8, the first drop in three months. Shortages of qualified employees, rising inflation, and supply chain disruptions led the list of challenges cited by business owners, who say they’re currently in good shape but are unsure of thier near-term outlooks.

    While the survey, though it remains above its 52-year average of 98, the corresponding Uncertainty Index rose 7 points from August to 100, the fourth-highest reading in over 51 years.

    “Optimism among small business owners decreased in September,” said NFIB Chief Economist Bill Dunkelberg in a press release. “While most owners evaluate their own business as currently healthy, they are having to manage rising inflationary pressures, slower sales expectations, and ongoing labor market challenges. Although uncertainty is high, small business owners remain resilient as they seek to better understand how policy changes will impact their operations.”

    Costs and supplies were prominent concerns, as inflation pushed the net percent of owners raising prices by 3 percentage points from August to a seasonally adjusted net 24 percent. Also, 14 percent of owners reported that inflation was their single most important problem, up 3 percentage points from August, while the 64 percent who reported that supply chain disruptions were affecting their business saw a 10 percentage point leap from the previous month. In a 5 percentage point monthly jump, 31 percent of business owners said they plan to increase prices over the next three months, up 5 points from August.

    Some bright spots included owners reporting higher earnings in September, a 3 percentage point jump from August, and the highest level since December 2021. And while labor quality remained an issue, only 18 percent said it was their biggest problem, down from 21 percent the previous month.

    Still, 32 percent of all small business owners reported job openings they could not fill in September, unchanged from August. The last time unfiled job openings fell below 32 percent was in July 2020. Of the 58 percent of owners hiring or trying to hire in September, 88 percent reported few or no qualified applicants for the positions they were trying to fill. A seasonally adjusted net 16 percent of owners plan to create new jobs in the next three months, up 1 point from August and the fourth consecutive monthly increase. Hiring plans are at their highest level since January.

    Access to affordable capital got tougher in September, as 7 percent of owners reported that their last loan was harder to get than in previous attempts, up 4 points from August and the highest reading of the year. Furthermore, a net 7 percent reported paying a higher rate on their most recent loan and the average rate paid on short maturity loans was 8.8 percent in September, up 0.7 points from August. Twenty-six percent of all owners reported borrowing on a regular basis, up 3 points from August. Four percent reported that financing and interest rates was their top business problem in September, unchanged from August.

    As national health care costs continue rising, 8 percent of owners reported the cost or availability of insurance as their single most important problem, down 1 percentage point from August.

    Will Swarts

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  • These 4 Sectors Are Still Recruiting as the Job Market Flattens

    With evidence mounting that most companies are now limiting hiring to replacing departing employees, it’s little wonder many people are hugging their current jobs even more tightly. That leaves a growing number of jobseekers facing employment situation that looks daunting— if not worse. The good news for those people is new data shows some sectors continue recruiting energetically, but the bad news is that most available positions aren’t what the majority of job seekers are looking for.

    That labor market mismatch was one of the main findings in job post platform Monster’s new report on hiring trends for the third quarter of 2025. Its research showed a majority of its employee-side users continue applying primarily for administrative, office support, software, data, and other information technology positions. But these have become increasingly rare as businesses replace those workers with artificial intelligence, and scale back hiring generally. But that famine of opportunity resembles something closer to a feast for people considering work with healthcare, sales, customer service, and logistics companies that continue increasing headcounts.

    In case current job seekers were too depressed about their prolonged hunt for work to catch it, the message of Monster’s report that is that people may need to shift their searches from sectors they’d prefer to work in to those still hiring.

    Healthcare companies regularly posted some of the biggest job creation numbers over the past year, so it’s little wonder Monster said they’re still offering six of the top 10 positions businesses are now filling. Those include registered nurses, physical therapists, radiology technicians or technologists, speech-language pathologists, respiratory therapists, and occupational therapists.

    “Clinical roles lead posting volume and remain among the fastest-growing categories,” the report said, citing current staffing shortages and rising demand from aging Baby Boomers requiring more care as drivers of continued hiring.

    Of course, not every programmer, data entry employee, accountant, or marketing writer can simply pivot from those low-hiring professions to more abundant healthcare jobs that often require training or degrees. Luckily there are other options for people willing to make an occupational change.

    Also qualifying for Monster’s hit parade of hot jobs are truck and delivery drivers. With logistics companies both understaffed and trying to keep up with ever growing e-commerce sales by online retail clients, increasing headcount has become a priority.

    For job seekers more inclined to commercial rather than transportation work, sales representatives and customer service employees finished fourth and 10th on Monster’s most-hired-jobs. The advantages of those position, the report said, is they’re “(r)evenue roles (that) stay funded even in slowdowns.” Companies hiring customer service reps, meanwhile, have a “(r)etention focus” and offer “many hybrid/remote” arrangements.

    Other sectors whose hiring trends are on the rise include security services, community and social services, and education and training.

    Frustrated job hunters unwilling to shift their work preference to the more available roles probably won’t be receptive to the other main lesson in Monster’s report, either. That involves moving to smaller urban zones where companies are hiring more, and leaving “high-volume hubs (that) cooled quarter-over-quarter” in the current analysis.

    That means people in New York, Boston, Chicago, San Francisco, and other low-hiring big cities might want to at least consider a move to the spots posting the highest recent rates of hiring. Those are led by Tacoma, WA, Asheville, NC, Charleston, SC, Colorado Springs, CO, and Sacramento.

    For everyone else, Monster’s report had a few other suggestions to assist their job hunting struggles.

    The first was to cease doing mass-volume applications, and focus on fewer, high-priority openings. As part of that, candidates should make the effort to tailor applications and resumes to the exact skills companies have specified, and stress other transferrable experience that would be of use in those positions.

    “It’s not about quantity; the key is not applying to hundreds of jobs and seeing what sticks,” Monster career expert Vicki Salemi told CNBC. “Actually, it’s the reverse. It’s having a specific job search.”

    The second suggestion was to make peace with the high likelihood that it’s going to take considerably more time to strike employment paydirt than it has in recent years.

    “The slower hiring life cycle doesn’t mean it’s not happening, it’s just delayed as employers do their due diligence,” the Monster report said. “It’s important for job seeker to be consistent with their job search efforts and to focus on what they can control. When they’re actively interviewing, candidates should continue to apply to new opportunities and expand their network.”

    And if that doesn’t work, driving a truck in Albany might be more the most viable short-term employment option.

    Bruce Crumley

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  • How Economic Uncertainty is Sapping Executives’ Confidence

    Critics of President Donald Trump’s trade war, mass deportations, and other contested policies have repeatedly warned the measures risked provoking renewed inflation, economic contraction, and mass job losses. While most of those dire predictions have —thankfully — not yet come to pass, U.S. executives are increasingly anxious about their companies and professional futures amid continued uncertainty all the same.

    Three different studies reflect growing concern among top managers about their personal and professional stakes in today’s uncertain business and economic environment. The broadest of those studies in scope was consultancy Deloitte’s latest quarterly poll of chief financial officers (CFO). While it found that the general confidence level of respondents rose slightly in September compared to earlier this year, it noted its 5.7-point reading “remains in medium territory… (and) is well below the 6.4 mark registered at the beginning of the year.” Other results included only 65 percent of participants saying the current economic situation is not safe to take risks in, and just 15 percent described the economy itself as “good.” 

    Among the top threats to business cited by participating executives were inflation, high interest rates, faltering economic growth, and supply chain disruptions from tariffs. But even if those didn’t prevent the confidence index of CFOs creeping up a little in Deloitte’s survey, even that mediocre outlook appeared strong compared to those captured by consultancy Korn Ferry in its recent poll of CEOs and board members.

    Its polling found 63 percent of top company officials said risks to their businesses had increased more rapidly over the past year. Meanwhile, just 11 percent of respondents said they felt fully confident about their organization’s ability to successfully navigate those multiplying challenges. The leading worries voiced by participants were minimal early returns on artificial intelligence investments, a shortage of qualified candidates to fill job openings, and internal resistance by existing staff to policy or cultural change.

    Another concern, focused on an aspect of the increased economic volatility observed since Trump came to office, was executives’ recognition that those risks are spread unevenly across various business sectors. Around 86 percent of leaders of consumer businesses said that growing unpredictability was a major concern, topping all other categories. Second most exposed to the rising uncertainty were industrial companies, with 83 percent calling it a big problem.

    “Many leaders are challenged to navigate so many forces simultaneously,” said Tierney Remick, head of Korn Ferry Services. “We’re seeing uneasiness — especially among long-tenured CEOs who have weathered decades of change but now face a convergence of risks unlike anything before.”

    A third survey, by workforce management platform Kahoot!, found uncertainty rising on a more personal level among the 221 human relations and training professionals polled. It found most responding managers feeling the same disengagement also reported by growing numbers of employees across U.S. workplaces over the past year.

    Nearly 80 percent of participating C-suite executives said that while their teams appear to view them as “fully engaged” in their work, only 47 percent said they actually were all-in and energized on the job. Over a third of respondents reported feeling burned out daily or several times during the week, with 22 percent saying they’ve often or always felt disconnected from teams they work with over the past six months.

    That psychological and emotional disconnect has consequences on two important levels.

    First, it led 46 percent of participating managers to say they’d be willing to give up their executive titles if that would allow them to feel engaged again. Another 26 percent confided that they’d considered quitting in the past year in order to stop feeling so adrift on the job.

    Meanwhile, with recent Gallup data showing only 31 percent of all employees saying they felt engaged at work, the risk of already slackening workplace energy and enthusiasm waning even more increases further as more managers overseeing staff similarly withdraw.

    But Kahoot! CEO Eilert Hanoa noted that as troubling as that development among top managers is, there are ways for companies to remedy the problem.

    “If leaders are ready to trade away their title for the chance to feel engaged, it signals something profound,” said Hanoa in comments about the findings. “Leaders are telling us loud and clear that recognition, training and connection matter more than status. Engagement cannot be a side project. If engagement fails at the top, it fails everywhere. The companies that respond will not only retain their leaders but unlock the energy of entire teams.”

    How do businesses effectively react? By showing executives the same attention, consideration, and support that lower-level employees say they need.

    When asked what would boost their engagement most, 69 percent of executives answering the survey cited more recognition and incentives from their companies, followed by 57 percent who said greater connection between teams would help. Nearly 45 percent said simply introducing more competition or gamification exercises at work would be beneficial — with 58 percent predicting that initiative alone would would result in increased energy, creativity, and fun on the job.

    Over half of respondents also getting more training to build their skills would strengthen their engagement. That’s a desire that a nearly 80 percent of lower-level employees have increasingly expressed, especially Gen Zers who place a premium on professional and personal growth.

    Meaning, there are many relatively easy ways employers can start addressing and reversing declining workforce engagement — awaiting the return of improved macroeconomic conditions capable of curing the broader doubts many companies now face at all levels of staff hierarchy amid today’s uncertainty.

    Bruce Crumley

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  • Why New Startup Founders Are More Optimistic Than Established Entrepreneurs

    Despite continued uncertainties about the bottom-line impact of tariffs, and lingering doubts about the economy’s health, polls have shown small business owners’ optimism has risen since the the beginning of the year. Now, new data indicates the confidence of more recent founders is even higher than the generally improving outlook of more established entrepreneurs.

    The upbeat expectations of relatively newer small business owners were captured in a recent survey by email, social media, and digital marketing platform Constant Contact. Its polling of nearly 1,600 entrepreneurs showed founders who launched their companies within the last two years expressed higher levels of optimism about growing their businesses over the next three months than the average of all survey respondents. Leaders of those younger firms were also markedly more confident about the near-term future than respondents whose businesses have operated for a decade or more.

    For example, while 29 percent of all participating founders said they expected to increase headcount in the next quarter, 41 percent of those who launched their companies less than 24 months ago said they planned on hiring within that period. By contrast, just 21 percent of business owners with 10 years’ experience or more thought they’d be able to hire new employees over the next three months.

    Moreover, 76 percent of business owners who launched less than two years ago and now have 100 employees or more said they plan to make new hires in the next three months. According to Constant Contact CEO Frank Vella, more recent entrepreneurs’ higher confidence partly reflects the vigor and positivity of leaders whose companies are still benefitting from early-stage growth.

    “For many this optimism isn’t just a feeling; it’s a reflection of their current growth trajectory,” Vella told Inc. in emailed comments. “Younger businesses are more likely to be hiring, and this rapid scaling imbues a greater confidence in their current position and trajectory. Many of these business owners are highly ambitious as well. They are actively scaling and investing in their future, which naturally fuels a more positive outlook.”

    Those upbeat views were also evident in respondents’ optimism about how they think their companies will perform over the next three months.

    While an average of 31 percent of all participants said they were “extremely confident” about how their business will fare over the next quarter, that figure rose to 41 percent among owners who’ve been in operation less than two years. It was even higher — 60 percent — for members of that more recent cohort with 100 employees or more. It then dropped to less than a quarter of entrepreneurs who launched more than a decade ago.

    Those differences in outlook, Vella says, may come down more recent founders still having the greater flexibility of younger companies to react the various business and economic challenges all small companies are confronting.

    “They were likely founded in the midst of the current economic landscape, which is defined by supply chain issues, rising prices, and general uncertainty,” Vella explained. “Because of this, their business models, supply chains, and marketing strategies were built from the ground up to withstand this volatility…They are accustomed to doing more with less and can adapt their plans without the inertia that can slow down a more established company. In this way they aren’t reacting to a ‘new normal’; this environment is their normal. That makes them structurally better positioned to navigate it.”

    That pliability of smaller businesses may also explain why their owners’ optimism of starkly contrasts the more somber views of corporate leaders. For example, the reading of the most recent Conference Board’s Measure of CEO Confidence survey came in at just 49 points — still in negative territory, despite a 15-point boost over the previous poll.

    By contrast, the National Federation of Independent Business’s recent monthly surveys have shown the confidence of member entrepreneurs steadily rising this summer. Constant Contact’s survey confirms that optimism among entrepreneurs, even as tariff and economic uncertainties weigh more heavily on corporate CEOs.

    Indeed, it found nearly a third of respondents saying now is “an extremely good time” to launch a new product. Meanwhile, nearly a quarter said they considered current market conditions beneficial for growing their companies by opening new physical locations.

    Asked if the higher optimism of more recently launched business founders might reflect an insouciance or naivete that more established business owners may have lost through the experience of tough times, Vella said he instead views their confidence rooted in their success in meeting today’s challenges.

    “These business owners haven’t experienced a more stable economic climate to compare today against, so they are less focused on what’s been lost and more focused on the opportunity directly in front of them,” Vella said. “So, rather than being naive, I’d say they are inherently adapted. They’ve built their businesses for the world as it is today, and that’s a powerful advantage that fuels their confidence and their capacity to grow.”

    Bruce Crumley

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  • CNBC Daily Open: U.S. seeks Boeing guilty plea

    CNBC Daily Open: U.S. seeks Boeing guilty plea

    The Dow Jones Industrial Average rose about 3.8% in the first six months of the year, lagging way behind the Nasdaq, up 18.1%, and the S&P 500, which jumped 14.5% — as investors plowed into artificial intelligence-related stocks.

    Brendan Mcdermid | Reuters

    This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

    What you need to know today

    Dow lags tech rally 
    The     Dow Jones Industrial Average rose about 3.8% in the first six months of the year, lagging way behind the Nasdaq, up 18.1%, and the S&P 500, which jumped 14.5% — as investors plowed into artificial intelligence-related stocks. On Friday, the S&P 500 and Nasdaq hit record highs before pulling back. The yield on the 10-year Treasury rose as investors digested the latest inflation data. U.S. oil prices rose for the third straight week amid fears of a war between Israel and the Iran-backed militia Hezbollah.

    Boeing ‘guilty plea’ 
    U.S. prosecutors plan to seek a guilty plea from Boeing over a charge related to two fatal 737 Max crashes in 2018 and 2019, attorneys for the victims’ family members said. The Justice Department is reviewing whether Boeing violated a 2021 settlement that shielded the company from federal charges. Boeing agreed then to pay a $2.5 billion penalty for a conspiracy charge tied to the crashes. The DOJ revisited the agreement after a door panel blew out of a new 737 Max 9 in January, sparking a new safety crisis.

    Under fire
    Nike CEO John Donahoe faces growing discontent as the company’s stock plummeted 20% on Friday, its worst day since 1980, after forecasting a significant decline in sales. As Wall Street digested the dismal outlook from the world’s largest sportswear company, at least six investment banks downgraded Nike’s stock. Analysts at Morgan Stanley and Stifel took it a step further, specifically calling the company’s management into question.

    Bitcoin windfall
    Mt. Gox, a bankrupt Japanese bitcoin exchange, is set to repay creditors nearly $9 billion worth of Bitcoin following a 2011 hack. The court-appointed trustee overseeing the exchange’s bankruptcy proceedings said distributions to the firm’s roughly 20,000 creditors would begin this month. The payout is likely to be a windfall for those who waited a decade, with Bitcoin’s value surging from around $600 in 2014 to over $60,000 today. One claimant, Gregory Greene, could potentially receive $2.5 million for his $25,000 investment.

    Inflation cooling
    A key inflation measure, watched closely by the Federal Reserve, slowed to its lowest annual rate in over three years in May, with the core personal consumption expenditures price index rising 2.6% from a year ago. “This is just additional news that monetary policy is working, inflation is gradually cooling,” San Francisco Fed President Mary Daly told CNBC’s Andrew Ross Sorkin during a “Squawk Box” interview. “That’s a relief for businesses and households who have been struggling with persistently high inflation. It’s good news for how policy is working.”

    [PRO] Rally will broaden
    The tech sector has driven market performance in 2024, with the S&P 500 tech group up 28% and Nvidia soaring 149%, while small-caps have lagged. Oppenheimer’s chief market strategist John Stoltzfus believes the rally will broaden. CNBC’s Lisa Kailai Han looks at the reasons behind his call. 

    The bottom line

    The New York Times editorial board has lost faith in President Joe Biden, calling for him to step aside. Iranians will need another go at electing a new president, French voters cast their votes in the first round of snap elections that saw big gains for Marie Le Pen's far-right party and Brits will go to the polls on Thursday.

    It's a busy political environment for markets to navigate. Wall Street has shown remarkable resilience thanks to the AI-powered rally in the first half of the year, which has seen the Nasdaq soar 18% so far. Nvidia is up almost 150%. There could be more to come; Bank of America believes Nvidia and Apple could still deliver "superior returns."

    While one of the biggest bulls on the Street expects the rally to broaden away from the megacaps, Wall Street wasn't feeling any love for Nike's CEO. The company had its worst day of trading since its IPO in December 1980, losing $28 billion in market cap on Friday after slashing its sales forecasts.

    John Donahoe was brought in from eBay to transform the athletic apparel giant's digital channels. The company ditched its retail partners, became too dependent on its aging sneaker ranges and lost ground to new contenders Hoka and On. It'll certainly make an interesting case study for MBA programs for all the wrong reasons. As Wall Street questioned Donahoe's position, he still had the approval of its founder.

    Friday also saw the Fed's favored inflation measure come in line with expectations, raising the prospect of interest rate cuts later this year.

    "I really think the Fed should tee up a cut at the July 31 meeting, confirm it at Jackson Hole in August and do it in September," Wharton finance professor Jeremy Siegel told CNBC's "Squawk on the Street." He added that one or maybe one-and-a-half rate cuts have already been priced in.

    "I actually think there will be more because there might be a little bit more softness in the economy and better inflation numbers, both of those feeding better rates," he continued. Siegel also said it is "hard to say" where the bull market's trajectory currently stands.

    In a four-day trading week — markets are closed for the July 4 Independence Day holiday — the big economic number to watch is the June jobless data on Friday. CNBC's Sarah Min has more on what to expect.

     — CNBC's Lisa Kailai Han, Yun Li, Jeff Cox, Leslie Josephs, Gabrielle Fonrouge, Hakyung Kim, Brian Evans, Spencer Kimball, Ryan Browne and MacKenzie Sigalos contributed to this report.

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  • CNBC Daily Open: Nvidia pushes past $3 trillion

    CNBC Daily Open: Nvidia pushes past $3 trillion

    Traders work on the floor of the New York Stock Exchange during morning trading in New York City.

    Michael M. Santiago | Getty Images

    This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

    What you need to know today

    Nvidia powers S&P 500 to record
    The     S&P 500 rose to a record after Nvidia crossed through the $3 trillion barrier for the first time and softer-than-expected jobs data raised hopes for an interest rate cut. The Nasdaq Composite also set a record, climbing almost 2%, with technology stocks Hewlett Packard Enterprises and CrowdStrike soaring on better-than-expected sales and earnings, respectively. The Dow Jones Industrial Average lagged behind, adding just under 100 points. The yield on the 10-year Treasury slipped, while U.S. oil prices rose from four-month lows.

    Nvidia passes Apple
    Artificial intelligence chipmaker Nvidia surpassed the $3 trillion market capitalization mark, pushing past Apple to become the second most valuable company behind Microsoft. Nvidia’s shares have risen 24% since its blockbuster earnings report in May, while Apple’s shares are up only 5% this year as sales growth stalled in recent months.

    Baron backs Musk’s pay deal
    Billionaire investor Ron Baron has publicly defended Elon Musk’s controversial $56 billion Tesla pay package. The Baron Capital chairman and CEO argues the package, tied to “aggressive” performance targets, is justified as without Musk “there would be no Tesla.” Baron previously revealed that his firm has made about 20 times its investment in Tesla since he first bought the stock in 2014. The package, previously voided by a Delaware judge, will face a shareholder vote on June 13.

    Elliott retakes SoftBank stake
    Elliott Management, an activist investor, has taken a $2 billion stake in SoftBank and is pushing for a $15 billion share buyback. This marks the second time Elliott has taken a stake in the Masayoshi Son-led firm. In 2020, at Elliott’s urging, SoftBank launched a $20 billion share buyback and asset disposal program. Elliott believes another buyback would boost SoftBank’s share price and signal confidence in CEO Son’s plans, particularly in AI.

    Electric air taxi gets FAA signoff
    Shares of Archer Aviation soared 6% after the Federal Aviation Administration granted the electric air taxi maker a key certification that would allow the company’s aircraft to eventually carry passengers. Archer, which has won orders and backing from United Airlines, is building electric vertical takeoff and landing aircraft for urban areas, which could reduce carbon emissions. Archer has partnered with automaker Stellantis to produce hundreds of the electric air taxis.

    [PRO] Buy the dip
    While investors are concerned about this biotech company’s potential loss of exclusivity and rising competition, Goldman Sachs sees an upside of more than 60%. The Wall Street bank believes investors should buy the dip and consider its “overlooked” pipeline. 

    The bottom line

    Billionaire investor Ron Baron's support of Elon Musk's $56 billion compensation package almost feels like looking in the rearview mirror. Nonetheless, it's a crucial intervention just ahead of next week's vote on what would be corporate America's biggest compensation package.

    Shareholder advisory firms, Glass Lewis and ISS, have told investors to reject the award. In voiding the original package, the judge said the process was flawed because of the close relationship the compensation committee had with Musk. For example, Robyn Denholm, the chair of Tesla, sold some of her Tesla options for $280 million between 2021 and 2022 — a "life-changing" transaction, as she described it. Other members of the team had relationships with Musk going back 15 years or more and regularly vacationed together.

    The package has no salary or cash bonus and sets rewards based on Tesla's market value rising to as much as $650 billion over the 10 years from 2018. The court also found the defendants did not prove the package was necessary to retain Musk.

    At its height, Tesla reached a market capitalization of $1.2 trillion in November 2021. Since then, the EV market has slowed and competition has intensified. Its current market cap is $560 billion. While Baron remains bullish and has made and expects to make a lot more money from Tesla, other investors expect the company's stock to fall by as much as 30%.

    Who would bet against Musk? He took a niche vehicle manufacturer that has flirted with bankruptcy and challenged Detroit, and now plans to reinvent the EV maker into a leader in AI and robotics.

    Still, Wall Street has a new favorite in Nvidia. It passed the $3 trillion mark and surpassed Apple to become the second most valuable U.S. company. Before Thursday's record high, UBS noted that Nvidia's year-to-date gain is responsible for a significant chunk of the S&P 500's 2024 rally.

    "NVDA accounts for 30% of the market's return YTD," wrote strategist Jonathan Golub in a Wednesday note to clients. "S&P 500 returns drop from 11.3% to 7.8% ex-NVDA. Many stocks have moved in step with the AI theme." 

    While some caution a bit of profit-taking, the company's 10-for-1 stock split should encourage side-lined retail investors to take a slice of the AI frenzy. Bank of America still sees an upside to the stock.

    — CNBC's Brian Evans, Alex Harring, Darla Mercado, Kif Leswing, Rohan Goswami, Leslie Josephs and Yun Li contributed to this report.

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  • Bank of Korea not likely to cut interest rates yet, says economist

    Bank of Korea not likely to cut interest rates yet, says economist

    Share

    Street Signs Asia

    Trinh Nguyen, senior economist at Natixis, says the central bank “has to balance between financial stability and … that deleveraging cycle.”

    03:25

    2 hours ago

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  • Singapore banks look ‘fantastic,’ says analyst

    Singapore banks look ‘fantastic,’ says analyst

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    Squawk Box Asia

    Pramod Shenoi of CreditSights says “all of the Singaporean banks are very comfortable with their China exposure.”

    03:42

    a minute ago

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  • Moody’s Ratings: We’re positive on India’s banking system

    Moody’s Ratings: We’re positive on India’s banking system

    Sally Yim of Moody's Ratings explains its negative outlook on China's banking system.

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  • Germany’s housebuilding sector is in a ‘confidence crisis’ as the economy struggles

    Germany’s housebuilding sector is in a ‘confidence crisis’ as the economy struggles

    A construction site with new apartments in newly built apartment buildings.

    Patrick Pleul | Picture Alliance | Getty Images

    Germany’s housebuilding sector has gone from bad to worse in recent months.

    Economic data is painting a concerning picture, and industry leaders appear uneasy.

    “The housebuilding sector is, I would say, a little bit in a confidence crisis,” Dominik von Achten, chairman of German building materials company Heidelberg Materials, told CNBC’s “Squawk Box Europe” on Thursday.

    “There are too many things that have gone in the wrong direction,” he said, adding that the company’s volumes were down significantly in Germany.

    In January both the current sentiment and expectations for the German residential construction sector fell to all-time lows, according to data from the Ifo Institute for Economic Research. The business climate reading fell to a negative 59 points, while expectations dropped to negative 68.9 points in the month.

    “The outlook for the coming months is bleak,” Klaus Wohlrabe, head of surveys at Ifo, said in a press release at the time.

    Meanwhile, January’s construction PMI survey for Germany by the Hamburg Commercial Bank also fell to the lowest ever reading at 36.3 — after December’s reading had also been the lowest on record. PMI readings below 50 indicate contraction, and the lower to zero the figure is, the bigger the contraction.

    “Of the broad construction categories monitored by the survey, housing activity remained the worst performer, exhibiting a rate of decline that was among the fastest on record,” the PMI report stated.

    The issue has also been weighing on Germany’s overall economy.

    German Economy and Climate Minister Robert Habeck on Wednesday said the government was slashing its 2024 gross domestic product growth expectations to 0.2% from a previous estimate of 1.3%. Habeck pointed to higher interest rates as a key challenge for the economy, explaining that those had led to reduced investments, especially in the construction sector.

    Light at the end of the tunnel?

    Ifo’s data showed that the amount of companies reporting order cancellations and a lack of orders had eased slightly in January, compared to December. But even so, 52.5% of companies said not enough orders were being placed, which Wohlrabe said was weighing on the sector.

    “It’s too early to talk of a trend reversal in residential construction, since the tough conditions have hardly changed at all,” he said. “High interest rates and construction costs aren’t making things any easier for builders.”

    Heidelberg Materials’ von Achten however suggested there could be at least some relief on the horizon, saying that there could be good news on the interest rate front.

    Germany has been benefitting from a 'peace dividend' for years, defense minister says

    “I’m positive inflation really comes down now in Germany, maybe the ECB [European Central Bank] is actually earlier in their decrease of interest rates than we all think, lets wait and see, and if that comes then obviously the confidence will also come back,” he said.

    Even if interest rate cuts are a slow process, von Achten says as soon as “people see the turning point” confidence should return.

    Speaking to the German Parliament about the economic outlook on Thursday, Habeck said the government was expecting inflation to continue falling and return to the 2% target level in 2025.

    The European Central Bank said at its most recent meeting in January that discussing rate cuts was “premature,” even as progress was being made on inflation. While the exact timeline for rate cuts remains unclear, markets are widely pricing in the first decrease to take place in June, according to LSEG data.   

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  • How RealPage influences rent prices across the U.S.

    How RealPage influences rent prices across the U.S.


    Share

    RealPage software is used to set rental prices on 4.5 million housing units in the U.S. A series of lawsuits allege that a group of landlords are sharing sensitive data with RealPage, which then artificially inflates rents. The complaints surface as housing supply in the U.S. lags demand. Some of the defendant landlords report high occupancy within their buildings, alongside strong jobs growth in their operating regions and slow home construction.

    09:56

    Sat, Feb 3 20248:27 AM EST



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  • Why U.S. renters are taking corporate landlords to court

    Why U.S. renters are taking corporate landlords to court


    A group of renters in the U.S. say their landlords are using software to deliver inflated rent hikes.

    “We’ve been told as tenants by employees of Equity that the software takes empathy out of the equation. So they can charge whatever the software tells them to charge,” said Kevin Weller, a tenant at Portside Towers since 2021.

    Tenants say the management started to increase prices substantially after giving renters concessions during the Covid-19 pandemic.

    The 527-unit building is located roughly 20 minutes away from the World Trade Center, on the shoreline of Jersey City, New Jersey. A group of tenants at the tower is involved in a sprawling class-action lawsuit against RealPage and 34 co-defendant landlords. The U.S. Department of Justice filed a statement of interest in the case in December 2023, arguing that the complaints adequately allege violations of the Sherman Antitrust Act.

    In November 2023, the attorney general of Washington, D.C., filed a similar but more narrow complaint against RealPage and 14 landlords that collectively manage more than 50,000 apartment units in the District.

    “Effectively, RealPage is facilitating a housing cartel,” said Attorney General of the District of Columbia Brian Schwalb in an interview with CNBC. His office filed the complaint on antitrust grounds. They allege that landlords share competitively sensitive data through RealPage, which then sets artificially high rents on a key slice of the local rental market.

    Office of the Attorney General for the District of Columbia, November 2023

    “Rather than making independent decisions on what the market here in D.C. calls for in terms of filling vacant units, landlords are compelled, under the terms of their agreement with RealPage, to charge what RealPage tells them,” said Schwalb.

    RealPage says its revenue management products use anonymized, aggregated data to deliver pricing recommendations on roughly 4.5 million housing units in the U.S. The company says its tools can increase landlord revenues between 2% and 7%.

    “Just turning the system on will outperform your manual analyst. There’s almost no way it can’t,” said Jeffrey Roper, a former RealPage employee and inventor of YieldStar.

    YieldStar is one of three key revenue management tools offered by RealPage. The software balances prices, occupancy and lease lengths to help property managers optimize their portfolio’s yield. The company feeds data from its models into a newer tool dubbed “AIRM” that considers the effect of credit, marketing and leasing effectiveness.

    RealPage told CNBC that its landlord customers are under no obligation to take their price suggestions. The company also said it charges a fixed fee on each apartment unit managed with its software.

    RealPage was acquired by Miami-based private equity firm Thoma Bravo for $10.2 billion in 2021. In court filings, Thoma Bravo has claimed that it is not liable for the alleged acts of its subsidiary outlined by plaintiffs in the class-action complaints.

    Renters told CNBC they discovered how revenue management software is used in real estate after reading a 2022 ProPublica investigation. Equity Residential investor materials show that the company started to experiment with Lease Rent Options between 2005 and 2008. RealPage acquired the product in 2017.

    “How could we possibly know?” said Harry Gural, a tenant in an Equity Residential property located in the Van Ness neighborhood of Washington, D.C. Gural says he has been involved in legal matters against his landlord’s pricing practices for more than seven years.

    Affiliates of Equity Residential are contesting a separate decision made by a local housing authority in Jersey City regarding prices set on the Portside Towers property. The company has filed a lawsuit in federal court challenging the decision, stating that the decision could result in millions of dollars in refunds for tenants.

    Equity Residential and other defendant landlords declined to comment on ongoing RealPage litigation.

    Redfin reports that asking rents in the U.S. ticked down to $1,964 a month in December 2023, a decline from recent highs. Prices are coming down in markets such as Atlanta and Austin, Texas, where home construction is high. But analysts believe low rates of homebuilding on the U.S. East Coast could give well-located landlords more pricing power.

    “Guys like us that own 80,000 well-located apartments, we’re still in a pretty good spot,” said Equity Residential CEO Mark Parrell in a June 2023 interview with CNBC.

    Watch the     video above to learn about the rising tide of lawsuits against U.S. corporate landlords.

    CORRECTION: A previous version of this article misstated when Equity Residential purchased Portside Towers.



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  • Treasury yields fall as investors weigh the 2024 outlook for interest rates

    Treasury yields fall as investors weigh the 2024 outlook for interest rates

    U.S. Treasury yields fell Wednesday, as investors considered the outlook for monetary policy and financial markets for the coming year.

    The yield on the 10-year Treasury dropped nearly 10 basis points to 3.789%. The 2-year Treasury yield edged down 4 basis points to 4.246%.

    Yields and prices move in opposite directions. One basis point equals 0.01%.

    In the last week of trading for 2023, investors considered the path ahead for interest rates and how this could impact the U.S. economy and financial markets.

    Earlier this month, the Federal Reserve indicated that interest rates will be cut three times next year, with further reductions expected in 2025 and 2026, as inflation has “eased over the past year.”

    Many investors have interpreted recent economic data, including the November U.S. personal consumption expenditure price index, as a sign that the Fed would be able to stick to its monetary policy expectations for next year.

    Uncertainty remains about when the central bank will start cutting rates, although traders are pricing in an over 70% chance of rate cuts at its March meeting, according to CME Group’s FedWatch tool.

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  • Why Fed rate hikes take so long to affect the economy, and why that effect may last a decade or more

    Why Fed rate hikes take so long to affect the economy, and why that effect may last a decade or more

    The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.

    The Fed’s leaders expect their interest rate decisions to eventually slow that growth.

    The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.

    “It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.

    “Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”

    A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.

    “It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”

    Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.

    “We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”

    Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.

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  • China’s property market: Two of China’s biggest lenders still have a lot of debt issue to resolve, says economist

    China’s property market: Two of China’s biggest lenders still have a lot of debt issue to resolve, says economist

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    Hao Hong, chief economist at Grow Investment Group, discusses China’s economic outlook and Chinese banks’ “very large exposure” to the property sector.

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  • Germany slides deeper into budget crisis. Here’s what you need to know

    Germany slides deeper into budget crisis. Here’s what you need to know

    German Chancellor Olaf Scholz (C), Finance Minister Christian Lindner (R) and Economy Minister Robert Habeck give statements to the media following the weekly government cabinet meeting on November 15, 2023 in Berlin, Germany.

    Sean Gallup | Getty Images News | Getty Images

    Germany’s budget is in trouble.

    Last week, the constitutional court ruled that it was unlawful to re-allocate unused debt originally designated for emergency Covid-19 pandemic funding to current spending plans.

    This week, the finance ministry froze spending across all ministries.

    But that could be just the tip of the iceberg as financial woes could lead to political ones, and even potentially endanger the future of Berlin’s coalition government.

    Germany didn’t get to this point overnight, however — in ways, the roots of the current crisis even predate the pandemic. And that is because of Germany’s so-called debt brake.

    A long time in the making

    Enacted in 2009, the debt brake limits how much debt the government can take on, and dictates the maximum size of the federal government’s structural budget deficit. The rules say it can be no bigger than 0.35 percent of Germany’s annual GDP.

    Since the global financial crisis, the debt brake has been the cornerstone of German fiscal policy.

    But then, the Covid-19 pandemic happened. The government took on emergency debt to try to stem the impact the pandemic had on its budget through a temporary debt brake suspension.

    As it turned out, the extra funding wasn’t actually needed. And so, the current coalition government decided to re-allocate it to finance policies aimed at climate change and a greener, more sustainable economy.

    Constitutional or not?

    Germany’s opposition was not happy about the re-allocation and eventually took the matter to Germany’s constitutional court. Last week, the verdict came in and, in a blow to the government, the court confirmed that the emergency funding was not allowed to be used for policy plans unrelated to the pandemic.

    The government appeared somewhat unprepared for this verdict and was left fumbling for answers when questioned by colleagues and the press.

    Some observers (and several Green party members), have suggested that the climate crisis is as much of an emergency as the pandemic. But the court’s ruling stands, and Germany’s budget now has a 60-billion-euro ($65 billion) hole.

    The government has since scrambled to figure out its financial plans, and earlier this week German media reported that the finance ministry had more or less shut down the possibility of any additional spending that hasn’t already been scheduled for 2023.

    A divided coalition

    A major factor in the government’s dilemma is the range of political positions the three coalition partners hold.

    There’s the Greens, who were the key instigators behind the climate policy plans that are now at risk and are therefore heavily attached to its success. Then the SPD, the social democrats, who would be content with making the debt brake more lenient or increase taxes. And the FDP, the Free Democratic Party, who control the finance ministry and don’t want higher taxes or higher debt.

    Germany, EU heavily impacted by trade tensions: Baker McKenzie

    But a full break up of the government is unlikely, according to a research note published by Eurasia Group directors Jan Techau, Mujtaba Rahman and Jens Larsen.

    “Government stability is not in question, and the coalition is still likely to complete its full term,” they said.

    “All three parties would face devastating losses in the (unlikely) case of snap elections, diminishing their appetite for breaking out of the current arrangement. No obvious new majority is possible in the current parliament,” they said.

    Any solutions?

    Solutions are still few and far between, especially ones that can be applied in the immediate term, and the government is still working on plans to readjust spending and funding that coalition partners can agree on.

    And in the long term?

    “An obvious way out would be to change the constitution,” Berenberg Bank’s Chief Economist Holger Schmieding said in a note. This would require a new consensus with at least some of the opposition politicians needed to reach the required two-thirds majority, he explained, which would mean political deals and sacrifices on divisive topics such as asylum rules.

    “For now, such a deal seems unlikely. But after the next election in September 2025, a (new) government that would once again need to include parts of the centre-right and centre-left may perhaps strike such a deal,” Schmieding said.

    Reforming the debt brake after the next General Election is also one of the paths ahead that Citi economists Christian Schulz, Giada Giani and Benjamin Nabarro foresee. They also note that long-term changes to the way the German government is funded could be ahead.

    “We expect the ruling to drive the government to build actual cash reserves in normal times as well as during emergencies, which would allow it to address long-term consequences of crises without breaching the debt break,” they wrote in a research note.

    And finally, the bar for what constitutes an “emergency” (and therefore allows for a suspension of the debt brake) could be lowered — and eventually perhaps even include the climate crisis.

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