The Executive Suite: 2023 Outlook for small businesses in the healthcare sector

Small businesses in the healthcare sector navigated a choppy and challenging 2022 by being nimble, creative, and disciplined. They will need each of these skills plus a little luck to succeed in what is likely to be a choppy and challenging 2023. The year 2022 will be remembered for the Federal Reserve’s interest rate hikes that attempted to tame inflation by slowing the economy. It will also be remembered for high, but declining, inflation and a resilient job market that fueled both wage growth and strong consumer spending.

As we enter 2023, employment remains high and wage growth strong, supporting the American consumer’s ability to spend. However, cracks in demand are beginning to appear. Consumers are still spending but many have eaten into their savings and increased their credit card debt to do so. A weakening of the U.S. consumer generally has a negative effect on U.S. small businesses, as most small business revenue is derived from consumer spending. If consumer spending declines in 2023, we can expect small businesses to suffer.

The macro forces of an aging U.S. population, new innovations in treatment, and broader insurance coverage for Americans continue to make healthcare an attractive industry in 2023. While staffing shortages, burnout, wage inflation, and mountains of paperwork that reduce employee satisfaction are serious problems, healthcare professionals are poised for continued growth in the coming year.

Many small businesses in the healthcare sector, and others, will also struggle to obtain the capital required to fund their daily operations. Banks are now facing increasing delinquency rates, higher borrowing costs, and deposit outflows as consumers burn through their savings and chase higher yields from non-bank investment opportunities. As a result, many banks are being forced to reduce lending to small businesses and raise prices. This means higher cost of capital and fewer options for growing small businesses.

Fortunately, there are several strong non-bank small business lenders, such as Kapitus, that are working to fill the funding gap left as banks tighten. Kapitus has been providing growth capital to small businesses for the past 17 years, through periods of expansion, contraction, natural disasters and a global pandemic. It is during periods of uncertainty that our customers need us most, and we expect 2023 to be a year in which our capital is especially valued.

Other economic factors that will have an impact this year:

Inflation: Economic discussions in 2022 were dominated by the surge in inflation and the Federal Reserve’s quest to bring it under control. Unemployment has remained low and job vacancies high throughout the Fed’s tightening cycle, despite efforts to reduce demand. As a result, wage inflation remains high, and we expect the Federal Reserve to continue raising rates in 2023 until wage growth and job vacancies are brought in line with historical levels. We expect inflation to remain above the Fed’s 2% target rate throughout 2023 with several more rate increases to come. However, we do expect the Fed’s action to ultimately succeed in slowing the economy and reducing inflation rates, especially in the second half of the year.

The Global Supply Chain: The global supply chain made a dramatic recovery in 2022 as the world opened-up from the pandemic and stimulus-driven excess demand subsided. Russia’s invasion of Ukraine disrupted oil and grain markets causing spikes in energy and food prices, but the market has largely compensated for these disruptions, and we expect the normalization of supply chains that we experience in 2022 to continue into 2023. Potential wild cards disrupting this prediction would include an escalation of the war in Ukraine that brought in additional combatants, or the introduction of another significant conflict such as the invasion of Taiwan. Also, while we believe that the worst of Covid is behind us, China continues to struggle with the virus and the potential for a new variant sweeping the world remains a possibility.

Manufacturing: The trend toward the repatriation of manufacturing to the U.S. will continue in 2023 as long supply chains and geopolitical unrest drive businesses to seek more reliable alternatives. The Infrastructure Act of 2021 and the Inflation Reduction Act of 2022 each provide incentives to companies that build manufacturing capacity in the U.S. and source from US manufacturers. We expect these incentives to begin having a positive effect this year. In addition, new manufacturing technologies should allow new facilities to operate more efficiently, bringing down the labor cost differential between the U.S. and overseas markets. Continued cost reduction for U.S. manufacturers is critical as a strong dollar has hurt the competitiveness of U.S. manufacturing on the global stage and is slowing the overall repatriation trend. Unfortunately, the dollar is unlikely to reverse course until the Fed ends its tightening cycle.

The political environment: With Republicans taking control of the House and Democrats holding the Senate and the White House, major economic legislation appears unlikely in 2023. A very small Republican majority in the House lends power to the more extreme elements of the party which could make governing difficult for the Speaker of the House who will need to negotiate with multiple constituents in order to move critical legislation (such as raising the debt ceiling) forward. We expect to see at least the credible threat of a government shutdown in 2023, leading to market volatility and a potential impact on interest and currency rates.

Small businesses employ nearly 50% of the workforce and account for approximately 44% of the country’s GDP, making them a critical force driving the U.S. economy. Small businesses owners are creative and resilient having managed through the pandemic, inflation, demand fluctuation and supply chain disruptions. Despite the challenges they face today, small businesses in the healthcare sector will adapt to whatever changes 2023 brings and move to meet the market where consumers are. This is the strength of our capitalistic system and the backbone of the U.S. economy.