Measuring Real-Time Insights Into Small Business Performance
Article
may 16 2024
Understanding the predictive value of the Fiserv Small Business Index®
Access to timely data is more crucial than ever, especially when it comes to understanding the forces shaping today’s economic landscape. However, data on small business performance is typically delayed by weeks or even months.
According to the U.S. Small Business Administration Office of Advocacy, small businesses make up over 99% of all businesses in the United States. They account for 44% of GDP and employ nearly half of the U.S. private-sector workforce. With that kind of economic importance, data latency poses a challenge for policymakers, lenders, economic forecasters and others making decisions that impact small businesses.
Traditional economic indicators, such as business output data from the Bureau of Economic Analysis, have significant delays. For example, GDP figures for a particular quarter are first released as an advance estimate nearly a month after the quarter ends, with further revisions that can stretch out several months. Other measures, such as the Monthly Retail Trade Survey (MRTS) and the Monthly Wholesale Trade Survey, are also subject to a 1.5-month lag.
The latency in government reporting can hinder effective decision making during critical economic periods, such as a recession or when monitoring for signs of inflation.
A solution to the small business data latency problem
Fiserv recently launched the Fiserv Small Business Index, a comprehensive measure of actual sales data from both retail and services. Unlike traditional indicators, the index offers a near real-time glimpse into the small business economy. It’s derived from over two million small business transactions processed by Fiserv across the U.S. This dataset is significantly larger than other resources, such as the 13,000 businesses surveyed in the MRTS.
The Fiserv Small Business Index can provide insights into the retail sector and various service industries much sooner than other sources. But is it also a leading indicator for economic conditions overall?
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Why these measures matter
Having an accurate view of the current state of the economy is crucial for policymakers and businesses. If recession-like signs emerge, the Federal Reserve and the U.S. Congress may implement mitigation measures, such as lowering interest rates and increasing funding to businesses. As recovery begins, the Federal Reserve aims to keep employment high and prices stable while watching for any signs of the economy overheating or inflation rising.
The Fed uses key data, including employment and production levels, along with indicators such as the Consumer Price Index and unemployment claims, to gauge economic health and make decisions on interest rates. The economic data informing these decisions is often delayed by months. To get ahead of these delays, they use leading indicators – statistics that can predict future economic activity.
For example, the U.S. GDP data for the second quarter of 2024 will not be available until late July and, even then, it’s just a preliminary number that might be revised significantly in the following months. This kind of lag is common with the GDP and other key economic measures, such as the MRTS report of retail sales. Advance data for MRTS, known as MARTS, is delayed weeks after the close of the reference month and includes only a subset of the larger MRTS companies. Revised data typically follows a month later. These delays make timely and accurate economic forecasting particularly tricky.
To assess the extent to which the Fiserv Small Business Index can be a reliable early indicator of the economic performance of small businesses, Fiserv engaged a member of the Fiserv Small Business Index Advisory Board, Georgia State University Professor Vincent Yao, to analyze the available data and compare it to leading government indicators. Yao compared the Fiserv Small Business Index to the MRTS and the Bureau of Economic Analysis’ quarterly gross output from national accounts for accommodation, professional and technical services, as well as ambulatory healthcare services sectors.
Predicting retail growth using the Fiserv Small Business Index
Yao’s analysis reveals that the Fiserv Small Business Index aligns closely with established indicators such as the MRTS. In the example shown below, among key retail subsectors where consumers are most active (gas stations, grocery, general merchandise retailers and after-market auto parts) the month-over-month sales trends produced by the Fiserv Small Business Index data align very tightly to the MRTS results. Although slightly lower, the correlations are robust for the remaining subsectors.
The consistent correlation underscores the reliability of the Fiserv Small Business Index as a predictor of retail market trends as well as the economy overall.
Fiserv Small Business Index and the Monthly Retail Trade Survey: MoM growth
Predicting gross output using the Fiserv Small Business Index
The merchant sales data underlying the Fiserv Small Business Index covers virtually all sectors defined in the North American Industry Classification System, and has the most complete coverage of sectors dominated by business-to-consumer sales activity. Yao examined notable service sectors, including accommodations, professional, scientific, technical and ambulatory health care services.
The accuracy of prediction against government figures like those reported for Personal Consumption Expenditure (PCE) are often above 90% for the most highly trafficked sectors by consumers. Since government figures like Personal Consumption Expenditures (PCE) and Gross Output often need corrections over time, having up-to-date sales data every month is extremely valuable for understanding the current economic situation accurately and quickly.
Additionally, Fiserv Small Business Index data correlates well with government statistics on gross output for service sectors such as accommodation, professional services and healthcare. These findings suggest that the index can also serve as a predictive tool for these areas, offering insights sooner than traditional measures.
Fiserv Small Business Index and federal gross output statistics: QoQ growth
Making use of timelier data
The Fiserv Small Business Index is proving to be a useful tool in economic forecasting. It stands out due to its timely delivery, broad coverage and reliance on actual sales data. This information can help policymakers and business leaders make informed decisions to stimulate economic growth or adjust strategies during economic shifts. For example, during recoveries, timely data can help economists and policymakers monitor for overheating signs and adjust policies accordingly.
As we continue to navigate a dynamic economic landscape, tools like the Fiserv Small Business Index will be vital for providing the timely, accurate data needed to make informed economic decisions.
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