Rumor has it that the screwdriver — a simple yet popular cocktail of vodka and orange juice — originated among Americans working in oil fields in Turkey in the 1940s. For an extra kick, they would secretly spike their orange juice with vodka and stir it with a screwdriver, hence the unusual name.A more toxic cocktail, stagflation — stagnant economic growth coupled with rising inflation and unemployment — last hit the US in the 1970s, a decade in which unemployment reached 9% and inflation passed 13%. Many experts worry that the country is once again heading in the same direction, although current key indicators point to a mixed picture:
- Q1 2025 growth, according to CNBC’s Rapid Update which averages forecasts from 14 economists, was low at 0.3%, though this is optimistic compared to the Atlanta Fed’s GDPNow estimate of -2.8%.
- Inflation was down from 2.8% in February to 2.4% in March, lower than expected.
- The unemployment rate edged up slightly to 4.2% in March, from 4.1% the previous month.
Looking Ahead to Lots of UncertaintyThese figures, however, reflect past performance and have not yet registered the impact of more recent economic policy, which is concerning many economists. The new tariffs are expected to stifle growth and raise inflation. The latest statement issued by Federal Reserve official Christopher J. Waller suggested that with an aggressive tariff package, economic growth would “likely slow to a crawl and significantly raise the unemployment rate. While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting,” he added.At the same time, federal job and funding cuts will continue to hit the labor market. Kathy Bostjancic, Nationwide’s chief economist, wrote in a note to investors: “The March employment report indicates that the labor market was in good shape as of last month, but it’s old news considering the Trump administration’s tariff announcement and ensuing global market rout.”Confidence Takes a Hit All AroundThis perspective is mirrored in consumers’ negative outlook. The University of Michigan’s Consumer Sentiment plunged to 50.8 in April, its lowest level since June 2022, and the Conference Board’s Consumer Confidence Index fell another 7.2 points in March, to 92.9. “Consumers’ optimism about future income — which had held up quite strongly in the past few months — largely vanished, suggesting worries about the economy and labor market have started to spread into consumers’ assessments of their personal situations,” said Stephanie Guichard, senior economist at The Conference Board.Meanwhile, small business confidence also dropped for the third month in a row to 97.4, below the 51Y average. The National Federation of Independent Business’s chief economist says: “The implementation of new policy priorities has heightened the level of uncertainty among small business owners over the past few months. Small business owners have scaled back expectations on sales growth as they better understand how these rearrangements might impact them.” Similarly, in April, the CEO Index — Chief Executive’s survey of CEO confidence among businesses of all sizes — was at its lowest level since the pandemic, with 62% predicting a slowdown or a recession.How You Can Help Business Customers Weather the StormCommunity financial institutions have a fundamental role to play in supporting their small and medium-sized business customers in these challenging conditions. They are uniquely placed to provide expert advice on how business customers can:
- Manage costs and drive efficiencies. To mitigate the effects of inflation and slower growth, businesses may be looking for opportunities to cut costs, for example by renegotiating supplier contracts or leases. They should also seek ways to streamline and automate repetitive processes by leveraging technology.
- Diversify their product offering. Offering new products and services can help offset any change in demand for their core offering, while diversifying marketing and sales channels can increase reach and provide access to additional customer segments.
- Double down on customer relationships. Excellent service will be key to retaining customers in tough times. SMBs should be looking to further personalize their approach to customers, offer flexible payment options, show empathy, and communicate any price increases with transparency and consistency.
No one can say with any certainty whether the US will experience stagflation this year. As the new economic policy takes shape, its effects on growth, inflation, and employment will become clearer. Meanwhile, the uncertainty is troubling industry experts, consumers, and small businesses alike. CFIs can offer advice to their SMBs on how to mitigate risk and find opportunities to grow by managing their costs, diversifying their product offerings, and focusing on customer relationships.
