7 Major Economic Risks Facing Small Business in 2024

Here are the most significant headwinds to be prepared for in the coming year.

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

Economists from Goldman Sachs and Bank of America are now predicting that the U.S. is headed for a so-called soft landing in the new year, as the Federal Reserve's interest rate hiking campaign appears that it will tamp down inflation without triggering a recession. That upbeat sentiment solidified last week when the Federal Reserve left interest rates unchanged and suggested that three rate cuts could come in 2024. Federal Reserve chair Jerome Powell struck a dovish tone at the press conference, sparking a public market rally. The S&P 500 approached an all-time high and the Vix Index, which is known as Wall Street's fear gauge, hit its lowest level since before the pandemic. 

This is quite the turnaround from where things stood at the start of 2023. This past year was supposed to usher in what economist Megan Greene, senior fellow at Brown University's Watson Institute for International and Public Affairs, dubbed "the most anticipated recession in U.S. history." At one point, odds of a downturn hit a staggering 100 percent, according to a forecast from Bloomberg Economics. Despite entrepreneurs feeling sullen about economic and business conditions, that consensus downturn never materialized. 

"Everyone is surprised by broadly how strong the economy has continued to be through 2023. Even those of us who did not expect a deep recession have been, I think, pleasantly surprised by how strong growth, consumer spending, and the labor markets have remained," says Brett House, professor of professional practice in economics at Columbia Business School. "The only thing that isn't aligning with a surprising amount of strength has been a surprisingly sour consumer sentiment."

That economic about-face is an important reminder. Even with optimistic outlooks cementing, entrepreneurs should be prepared for any potential risks lurking underneath the auspicious surface of slowing inflation and robust job growth. Even Powell cautioned, "It is far too early to declare victory, and there are certainly risks." Wells Fargo Economics echoed that warning in its own outlook for 2024. "The U.S. economic outlook over the next year or so is far from sunny," wrote economists Jay H. Bryson, Nick Bennenbroek, Jackie Benson, and Shannon Seery Grein. "A full-blown economic storm may not develop, but storm clouds likely will dominate the horizon for the foreseeable future."

Here are some of the biggest economic risks that entrepreneurs should be prepared for in the new year. 

Resurging inflation

Inflation has eased. At 3.1 percent year-over-year, the consumer price index is now well below its 40-year high of 9.1 percent in June 2022, but the measure remains above the Federal Reserve's long-term goal of 2 percent and one of the most pressing problems cited by small-business owners. And as history has shown, fighting inflation is difficult. At his press conference, Powell stressed that even the recent good news on the inflation front  does not mean the battle against rising prices is won. "Inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain," he said. 

In its outlook, Well Fargo Economics noted that persistent inflation--and the subsequent elevated interest rates needed to tame it--remain a risk. "It would be premature to claim that the economic storm has passed, because the battle against inflation has not yet been decisively won," the bank's economists wrote.

Slowing growth

Economic growth has remained strong over this year--despite the rate shock. In the third quarter, gross domestic product increased by 4.9 percent year-over-year--the fastest rate since the fourth quarter of 2021. But some economists predict that pace will slow--if not come to a complete halt--in the new year because of elevated interest rates. Wells Fargo Economics says real GDP growth will be "subpar at best," while Vanguard calls for a mild downturn in its outlook. 

House also predicts that growth will level off next year, and he says policy will be in part to blame. That's because the tailwinds of the pandemic stimulus will wane, he explains. Plus,  the Biden administration's substantial industrial policy, or targeted measures meant to bolster specific parts of the U.S. economy like the Inflation Reduction Act and the Chips Act, is not likely to be replicated on the same scale.

Tight credit conditions

This past year, entrepreneurs have been forced to contend with an increasingly tough credit environment. In October, about a third of banks reported tightening lending standards for companies with less than $50 million in annual sales, according to the Federal Reserve Senior Loan Officer Opinion Survey, with 87.5 percent of banks citing a less favorable or uncertain outlook. Meanwhile, only 13 percent of small-business loans were approved by big banks, with more than $10 million in assets, last month, according to the most recent Biz2Credit Small Business Lending Index.

That dynamic is not likely to change in the new year. "Real interest rates are at the highest level they've been since the pre-2008 period, and that will begin to bite to an increasing extent on financial and credit conditions," says House.

A commercial real estate crash

The return-to-office push stalled out this year as the majority of U.S. companies settled on some degree of remote work, according to data compiled by the hybrid work software company Scoop Technologies. That's bad news for office buildings, and Washington State University assistant economics professor Chris Clarke warns that a potential commercial real estate crash could be a major risk for more than just landlords.

"Some of these commercial real estate companies are going to go under and are going to suffer some losses," says Clarke. "The worry is: Is this going to be a big enough systematic problem to affect the entire economy?" 

If such a downturn did ripple out from commercial real estate into other sectors of the economy, Georgia State University professor Rajeev Dhawan, who serves as the chair of the school's Economic Forecasting Center, says small and medium-size banks that hold a large portfolio of these commercial mortgages would be the first to feel the impact. 

Conflict with China

One risk that is always top of mind for economists: conflict between the world's largest economies. How the U.S. and China manage tensions--over everything from trade to Taiwan--will continue to have implications for not just the U.S. economy but the entire global economy, says House. 

The only solace on the China front may be time itself. While Clarke cites military conflict with China as the top threat over the next decade, he cautions that he is not as worried about escalation coming directly in 2024.

The impact of artificial intelligence 

In a downturn year for venture capital, AI startups captured a quarter of all funding, and Goldman Sachs Research predicted these technological breakthroughs in AI could drive a 7 percent, or nearly $7 trillion, increase in global GDP over the next decade. Still, that potential for growth does not come without risks. OpenAI's own company bylaws reportedly contain provisions for how the company would operate in a hypothetical future where the economy has been so fully upended by AI that currencies no longer have any material value, according to Politico. 

For Vanguard chief global economist Joe Davis, artificial intelligence remains the seminal mega trend overarching everything else in the economy. "The question that I think we all will face is: Do we have too few workers in the future or too few jobs?" Davis said. "The industry doesn't have an answer. There are opinions, but there aren't answers."

The post-pandemic unknown

Economists say one of the biggest economic risks on the horizon is uncertainty itself. The post-pandemic recovery has been weird--refusing to follow the trend lines of a typical business cycle. In that sort of environment, it can be difficult even for economists to articulate the most pressing risks, according to Dhawan. "I still don't think we've hit a normalcy," he says. "We're still trying to figure out: How do we work and where do we live in this post-pandemic economy."

House also sees the economy as still shrouded in an enormous amount of uncertainty from the pandemic and says that people can feel that precarity. "Even though the data says that in this moment, things are much better than they've been in a long time, that's within a system that pushes more risk on individuals than has been the case in the past," he explains. "People are acutely aware of that."