Retail

Things To Know: Store Front Business Index Predictions Vs. Reality

Making predictions about the future of the economy is a difficult and often imprecise endeavor. Look no further for verification than the burst of the housing bubble in 2008 and the accompanying market crash. But, for businesses and investors looking to confront future market conditions, meaningful and accurate financial forecasts remain an important resource.

The PYMNTS.com Store Front Business Index™ attempts to predict how small business will perform and grow in the coming months. It forecasts performance along several important metrics that correlate with the health of the industry, including the number of individuals employed by main street businesses, the number of small and medium-sized business (SMB) establishments and wage levels at those enterprises.

The Index also analyzes predictions it made in previous quarters and contrasts them with real-life economic performance. That said, how did the most recent edition do? According to the Index, this is how its predictions performed in comparison with actual industry-wide performance.

Predictions Two Quarters In Advance Are Less Accurate.

This is to be expected, but it’s worth stating that the further out predictions are made, the less accurate they’re likely to be. This is especially true for wage growth, which the Index radically overestimated in Q4 2015, and also for general growth in the number of establishments and Index correlation with U.S. gross domestic product (GDP). The two-quarter prediction for employment is slightly closer to reality than the prediction made more recently, however, which goes to show that certain trends in small business growth hold true while others can shift dramatically in the span of just a few quarters.

Growth In Employees and Establishments Was Almost Spot On.

While two-quarter predictions are significantly harder to make and therefore less accurate, some previous Index predictions were very close to coming true — particularly those made about growth in the number of SMB employees and growth in the number of SMB establishments.

The number of small business establishments grew by 2 percent in Q2 2016, just a few fractions of a percent above what the Index predicted a quarter before. Likewise, the number of employees at small businesses increased by just a hair more than 2 percent, while the Index predicted an approximately 2.4 percent increase.

Wages Were Overestimated.

Some things are impossible to predict. For the first time since the end of the Great Recession, there was a wage drop between Q4 2015 and Q1 2016, and the Index’s prediction for wage-growth over that period was significantly overstated as a result.

Anomalies like this are uncommon, however, and the Index’s prediction for wage growth between Q1 2016 and Q2 2016 was just as accurate as its predictions for Employees and Establishments. In fact, the difference between actual wage growth and the Index’s Q1 prediction stood at less than 0.1 percent. Wages grew by roughly 2.6 percent, while the Index predicted growth of 2.5 percent.

The Index Is Very Accurate During Economic Expansion.  

The Store Front Business Index™ and the American economy both do well when the country isn’t in a period of economic contraction, and the health of the Index is a good measure of the health of the economy during periods of economic expansion. Before the Great Recession, the U.S. economy and the Index grew at rates of 2.4 and 2.5 percent, respectively. After the recession ended, they grew at 2.1 and 2.2 percent.

During periods of economic contraction, however, correlations are less close. The Index performed significantly better than the U.S. GDP during the recession. According to the Index, this is likely because some industries it measures perform significantly better than others do during periods of economic contraction. But, as a general measure of the health of the U.S. economy, the Index performs quite well.

When it comes to most of the metrics it measures, The PYMNTS.com Store Front Business Index™ pretty accurately predicted small business growth in Q2 2016, although, as expected, it does less well when making predictions multiple quarters in advance. All told, it seems the Index should be considered a reliable resource for businesses and investors looking to make prudent decisions regarding main street enterprise, especially in the near future.

To see how all the figures compare, read the full report.

Storefront businesses, the shops that line the main streets and side streets of the local community — including convenience stores, dry cleaners, fitness centers, hardware stores, home remodelers, coffee shops, restaurants, watering holes, hair salons and more — are the heartbeat of the local economy. The PYMNTS Store Front Business Index™ has assembled data on each of these types of businesses across the U.S. and regularly measures their vitality. Check back for updates on the latest trends in the space.

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