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The stock market is an excellent economic indicator for the U.S. economy. It reflects how well all listed companies are doing. If investors are confident, they will buy stocks, stock mutual funds, or stock options. Some experts believe markets predict what the savviest investors think the economy will be doing in about six months. What Makes the U.S. Stock Market Attractive U.S. financial markets are very sophisticated and make it easier to take a company public than in other countries. Information on companies is also easy to obtain. That raises the trust of investors from around the world. As a result, the U.S. stock market attracts the most investors. It’s an attractive place for U.S. companies to go when they are ready to grow. 3 Ways That Stock Markets Affect the Economy Stock markets affect the economy in three critical ways: They allow small investors to invest in the economy. They help savers beat inflation. They help businesses fund growth. Allowing Small Investors to Invest in the Economy Stocks allow the individual investor to own part of a successful company. Without stock markets, only large private equity investors and financial institutions could profit from America's free market economy. Helping Savers Beat Inflation Investing in the stock market helps savers beat inflation over time. The rule of thumb is that stock prices increase 7% a year on average after taking inflation into account.1 That's enough to compensate most investors for the additional risk of owning stocks rather than bonds (or keeping the money in a savings account). Note Stocks provide the capital for companies to grow large enough to gain a competitive advantage through economies of scale. Helping Businesses Fund Growth. Growing, successful businesses need capital to fund growth and the stock market is a key source. In order to raise money this way, owners must sell part of the company, and to do so they "take the company public" through an initial public offering (IPO) of the company's shares. An IPO raises a lot of cash. It also signals that the firm is successful enough to afford the IPO process. The drawback is that the founders no longer own the company; the stockholders do. However, founders can retain a controlling interest in the company if they own 51% of the shares. Note Stocks indicate how valuable investors think a company is. When stock prices rise, it means investors believe earnings will improve. Falling stock prices mean investors have lost confidence in the company's ability to profit. How a Stock Market Crash Affects the Economy Stock prices rise in the expansion phase of the business cycle.2 Since the stock market is a vote of confidence, a crash can devastate economic growth. Lower stock prices mean less wealth for businesses, pension funds, and individual investors. Companies can't get as much funding for operations and expansion. Note When retirement fund values fall, it reduces consumer spending. A stock market crash will adversely affect the nation’s gross domestic product as personal consumption and business investment are some of the major components of GDP. If stock prices stay depressed long enough, new businesses can't get funds to grow. Companies that had invested their cash in stocks won't have enough to pay employees, or fund pension plans. Older workers may find that they don't have enough money to retire.

Because of its size and interconnectedness, developments in the US economy are bound to have important effects around the world. The US has the world’s single largest economy, accounting for almost a quarter of global GDP (at market exchange rates), one-fifth of global FDI, and more than a third of stock market capitalisation. It is the most important export destination for one-fifth of countries around the world. The US dollar is the most widely used currency in global trade and financial transactions, and changes in US monetary policy and investor sentiment play a major role in driving global financing conditions (World Bank 2016). At the same time, the global economy is important for the US as well. Affiliates of US multinationals operating abroad, and affiliates of foreign companies located in the US account for a large share of US output, employment, cross-border trade and financial flows, and stock market capitalisation. Recent studies have examined the importance of global growth for the US economy (Shambaugh 2016), the global impact of changes in US monetary policy (Rey 2013), or the global effect of changing US trade policies (Furman et al. 2017, Crowley et al. 2017). It is likely that there will be shifts in US growth, monetary and fiscal policies, as well as uncertainty in US financial markets. What will be the global spillovers? Our recent work (Kose et al. 2017) attempts to answer these questions: How synchronised are US and global business cycles?How large are global spillovers from US growth and policy shocks?How important is the global economy for the US?How synchronised are US and global business cycles? Business cycles in the US, other advanced economies (AEs), and emerging market and developing economies (EMDEs) have been highly synchronous (Figure 1.A). This partly reflects the strength of global trade and financial linkages of the US economy with the rest of the world, but also that global shocks drive common cyclical fluctuations. This was particularly the case at the time of the 2008-09 Global Crisis. It is not a new phenomenon, however. Although the four recessions the global economy experienced since 1960 (1975, 1982, 1991, and 2009) were driven by many problems in many places, they all overlapped with severe recessions in the US (Kose and Terrones 2015). Other countries tend to be in the same business cycle phase as the US roughly 80% of the time (Figure 1.B). The degree of synchronisation with US financial cycles is slightly lower, but still significant – credit, housing, and equity price cycles are in the same phase about 60% of the time. Although it is difficult to establish empirically whether the US economy leads business and financial cycle turning points in other economies, recent research indicates that the US appears to influence the timing and duration of recessions in many major economies (Francis et al. 2015). Figure 1 Synchronisation of business cycles A. Correlations with US business cycles Image: Haver Analytics; World Bank; Kose and Terrones (2015); IMF. B. Concordance with US business and financial cycles Image: Haver Analytics; World Bank; Kose and Terrones (2015); IMF. How large are global spillovers from US growth and policy shocks? A surge in US growth – whether due to expansionary fiscal policies or other reasons – could provide a significant boost to the global economy. Shocks to the US economy transmit to the rest of the world through three main channels. An acceleration in US activity can lift growth in trading partners directly through an increase in import demand, and indirectly by strengthening productivity spillovers embedded in trade. Financial market developments in the US may have even wider global implications. US bond and equity markets are the largest and most liquid in the world and the US dollar is the currency mostly widely used in trade and financial transactions. This makes US monetary policy and investor confidence important drivers of global financial conditions (Arteta et al. 2015, IMF2015). Given its role in global commodity markets (the US is both the world’s largest gas and oil consumer and producer), changes in US growth prospects can affect global commodity prices. This affects activity, fiscal and balance of payment developments in commodity exporters. Estimates indicate that a percentage-point increase in US growth could boost growth in advanced economies by 0.8 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point after one year (Figure 2.A). Investment could respond even more strongly. A boost to investment could come for instance from fiscal stimulus measures – but the effect would largely depend on the circumstances of the implementation of these measures, including the amount of remaining economic slack, the response of monetary policy, and the adjustment of household and business expectations to the prospect of higher deficit and debt levels. A faster tightening of US monetary policy than previously expected could, for instance, lead to sudden increases in borrowing costs, currency pressures, financial market volatility, and capital outflows for more vulnerable emerging market and developing economies. Even in the absence of actual policy changes, heightened uncertainty driven by financial market volatility or ambiguity about the direction and scope of US policies could discourage investment both in the US and in the rest of the world. Empirical estimates suggest that a sustained 10% increase in US stock market volatility (specifically, the VIX) could, after one year, reduce investment growth in the US by about 0.6 of a percentage point, in other advanced economies by around 0.5 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point (Figure 2.B). Figure 2 US growth and uncertainty spillovers A. Growth spillovers Image: Haver, Bloomberg, World Bank estimates. B. Uncertainty spillovers on investment growth Image: Haver, Bloomberg, World Bank estimates. How important is the global economy for the US? Important as the US is to the global economy, the US economy is also affected by its trade and financial linkages with the rest of the world. Global economic developments play an important role in driving activity and financial markets in the US. US multinationals account for a large share of US output and labour productivity growth, and their presence in financial markets is large. In turn, foreign multinationals operating in the US provide a large share of US employment and exports (Figure 3.A). Much of the global value chain activity is conducted through US multinational corporations and their affiliates abroad. Overall, one-quarter of US exports represents US value added embedded in other countries' exports. This ‘forward participation’ is particularly high in chemicals, business services, and electronics, and with China, Canada, and Mexico. ‘Backward participation’ is more limited: the average import content of US exports was 13% in 2014, well below the average for other advanced economies (27%). This interconnectedness is an important source of spillovers between the US and the global economy. As a result, growth setbacks originating in other economies, or policy changes affecting market access of US companies, can have detrimental effects on the US. These effects are particularly noticeable in the more globally integrated manufacturing sector (Figure 3.B). Figure 3 Importance of the global economy for the US economy A. Role of foreign multinational corporations in the US Image: Bureau of Economic Analysis, World Bank estimates. B. Spillover to US from 1 percentage point increase in global, advanced economy, and emerging market and developing economy growth Image: Bureau of Economic Analysis, World Bank estimates. Acceleration or uncertainty? Given its size and the strength of its ties with the global economy, shocks to the US economy are transmitted globally through many channels. On the one hand, an acceleration in US growth could be expected to have positive effects for the rest of the world, if not counterbalanced by increased trade barriers or an unexpected tightening of global financing conditions. On the other hand, persistent policy uncertainty could hamper growth throughout the global economy, and could have particularly adverse effects on investment growth in emerging market and developing economies, which have already showed weakness in recent years (World Bank 2017).

Young firms' up-or-out dynamics are important for an economy's growth. To perfect novel business concepts, a lot of experimentation is required. Success results in improvements in technology (which promote economic growth), but failure is inherent to the experimentation process to which startups disproportionately contribute. The 2018 paper "Growth Through Heterogeneous Innovations" quantifies that 25.7 percent of aggregate growth that comes through innovation is accounted for by entering firms alone.

But since 2020, there has been an increase in entrepreneurial activity.

According to data from the Small Business Administration (SBA), small businesses create two-thirds of new jobs, increased competition among businesses, and are often the forces behind innovation and positive adjustments in efficiency.

While economic uncertainty, mass redundancies, and the changes in priorities people experienced post-pandemic led to many people setting up on their own in recent years, digital transformation has also supported the rise in small businesses. Digital marketing, online shopping, remote working, and continued digital transformation have helped self-employed people and small businesses to operate successfully. 

So, how important are small businesses to the economy?

Just as enough tiny droplets of water slowly fill a bucket, the growth of small businesses fills the U.S. economy. Big corporations might get a lot of attention when it comes to creating jobs, but small businesses employ more people and are more resilient when times get tough. Before coming up with something innovative that propelled them into growth, all big businesses once started out small. Not only are small businesses driving the U.S. economy, but they also keep the American dream alive. According to the U.S. Small Business Association (SBA), small businesses of 500 employees or fewer make up 99.9% of all U.S. businesses and 99.7% of firms with paid employees. Of the new jobs created between 1995 and 2020, small businesses accounted for 62%—12.7 million compared to 7.9 million by large enterprises. A 2019 SBA report found that small businesses accounted for 44% of U.S. economic activity. Without small businesses, the American economy and workforce would be a pretty wild landscape to imagine. Not only do small businesses provide more jobs, they also bring careers and opportunities. Successful small businesses put money back into their local community through paychecks and taxes, which can support the creation of new small businesses and improve local public services. No matter how small it starts—one, two, five, 10 employees—within that town, the city or the county, your small business creates new economies where once there was nothing. Small businesses are also better able to focus more energy on their customers and their needs, which can make them more adaptable to change in times of economic uncertainty. A global health crisis may have rocked the economy, but the formation of new U.S. businesses intending to hire employees rose to historic peaks in 2021, with nearly 1.4 million applications by September and over 400,000 more than at the same point in 2019. When tough times for big businesses lead to layoffs, small businesses become an opportunity. To become big, all businesses once started out small. In 1978, when the track-and-field coach and his former student who founded Blue Ribbon Sports by making running shoes with a waffle iron changed their company name to Nike, they never imagined it would become the massive multinational corporation that it is today. The two high school friends and devoted computer tinkerers who ended up founding their own software company in 1975 under the name Microsoft could never have expected how large their once small business venture would soon become. Small businesses grow because they draw innovation, attracting talent that brings inventions or new solutions to old ways of doing business that larger corporations have less flexibility to incorporate. This is why big companies today want to acquire small businesses, for their innovators. Apple and Google may be known for their innovation, but they also buy up small startups with innovative new technology to boost this development. Big businesses and even big government projects depend on small businesses as subcontractors, vendors and customers. Federal bills focusing on new jobs to come out of a recession talk a lot about building bridges and freeways, but less about the small businesses across the country that bid for these contracts and carry them out. No matter where you find significant economic development, small businesses are behind it. The opportunity for people to found, run or work for small businesses is the pathway to achieving the American dream. It creates an environment of mythical energy where desires are fulfilled and innovation is at its peak. Creating small businesses, becoming profitable and hiring people to share in those economic gains is what makes this country free. Foreigners who lack those same opportunities in their own country come to America seeking their own dream—and I should know: I’m one of them. Because of their importance, big business campaigns should consider their ability to support small businesses, therefore encouraging thriving economies. A strong economy supports both big and small businesses, but no society can thrive without the presence of small businesses. Corporations are reliant on small businesses to allow them to continue to succeed. By helping your neighbor, you ultimately are helping yourself (and your business). Businesses, in particular, should consider supporting small businesses by, for example: Sourcing ingredients for your restaurant from local farmers. Selling small businesses' products in your storefront. Sharing social media posts from small businesses. Small businesses are everywhere, but everyone in the U.S. has the right to create their own from the ground up, as well as the necessary access to the technology, investors, loans and government support to help out. This well-developed support system attracts a huge pool of dreamers: immigrants with the hopes of achieving their lifelong goals, creating something new and finding success. For them, arriving here is like diving into a crystal-clear pool of opportunity—they can see it and go after it. Small businesses make this possible. While government aid is necessary to continue supporting small business growth, so is consumer support. Inexpensive products delivered to your home from Amazon are nice, but also consider supporting small businesses. Don’t be so quick to judge and leave negative reviews because of one bad day. Instead, make an effort to put money back into the main drivers of our economy and look to them for employment opportunities to help them keep their doors open. The more we encourage small businesses, the longer we keep the American dream alive.

Small business owners are feeling better about the U.S. economy as inflation cools and recession fears subside, according to a new survey. Indeed, economic optimism among smaller employers is at a 22-year high, PNC Financial Services Group found in polling small and midsize business owners. 

A majority of respondents – 55% – said they are "highly optimistic" about the national economy this year. That's up sharply from 34% last fall and 26% a year ago, according to the Pittsburgh-based bank. Roughly eight in 10 owners also expressed confidence about their own businesses' financial prospects. Over the next six months, just over half of the business owners who were surveyed think their profits will rise, while only 5% expect earnings to fall. 

Despite the popularity of business confidence as a leading indicator of future output, the direct link between the former and business investment has not yet been investigated. Our paper fills this gap in the literature. Using quarterly US data for over sixty years, we investigate whether confidence predicts business investment, and whether confidence can forecast investment downturns and the direction of investment growth. We find that business confidence leads US business investment growth by one quarter, and structures by two quarters; and business confidence has predictive ability for investment growth even after controlling for conventional factors such as output, user costs, cash flows, and stock prices. Business confidence has a superior predictive power, relative to traditional factors, for investment downturns over 1–3-quarter forecast horizons and direction of investment growth over 2-quarter forecast horizons in the US economy. Impulse response analysis reveals that exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the ‘animal spirits’ view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of behavioural factors determining investment growth.

The Business Confidence Index reflects the sentiment and expectations of businesses regarding the state of the economy. It measures their confidence in investing, hiring, and expanding operations. A high Business Confidence Index indicates optimism and a willingness to take risks, which can lead to increased business activity and economic growth. Conversely, a low index suggests caution and reduced investment, which can slow down the economy. For example, if the Business Confidence Index rises from 50 to 60, it shows improved business sentiment.

These key economic indicators are vital tools for businesses and policymakers to understand the current state of the economy and make informed decisions. By closely monitoring these indicators, companies can adapt their strategies and forecast future market conditions, allowing them to stay ahead of the competition and maximize their growth potential.

Economic growth is the result of the interaction between aggregate supply (total production) and aggregate demand (total demand). There are two general types of causes of economic recession: supply shocks and demand shocks. A supply shock occurs when something reduces the economy’s ability to produce output at a given price level. A demand shock occurs when something reduces businesses’ and households’ willingness to consume and invest at a given price level. Supply and demand shocks happen unpredictably and irregularly, which is why expansions are not a regular length and recessions are hard to consistently avoid. Supply shocks and demand shocks can be caused by a variety of events, some of the most common of which are discussed below.

Not all economic shocks are so clear cut, and some have both supply and demand components. For example, the COVID-19 pandemic resulted in significant supply and demand disruptions. On the supply side, the pandemic caused disruptions in the production process as labor and trade became constrained. On the demand side, fears and mandated restrictions resulted in sudden decreases in consumer and business spending. While the following sections categorize shocks as purely supply or demand, in actuality, shocks may affect the economy through several channels.

2. Understanding the Impact of Business Confidence on Economic Growth

Business with Confidence

The business confidence index allows us to track output growth and can be used to anticipate turning points in economic activity. A lower business confidence index for example can indicate that businesses anticipate pulling back on production or orders of goods in the near future, which in turn will slow down the economy.

This measures business owners' confidence in the economy based on opinion surveys on future developments. It considers production, orders and stocks of finished goods. A high confidence level can indicate optimism about future economic conditions, which can lead to increased investment and growth.

As Ackerlof and Shiller (2008) stressed, confidence plays an important role in predicting economic fluctuations. Hence, we begin our research by testing how confidence affects economic growth. Acemoglu and Scott (1994) and Barsky and Sims (2012) conducted similar research, but they focused on a single country and only studied the role of consumer confidence. To extend their work, we use panel data on 41 countries and add both consumer and business confidence to our regression. Table 2 shows the effect of confidence on economic growth. The following conclusions can be drawn from the results displayed in Table 2. First, a rise in confidence will lead to faster economic growth. As shown in Columns 1–3, innovation in BCI alone can stimulate the economy substantia lly, by 13.2 percent, while innovation in CCI alone can stimulate the economy even further, by 33.4 percent. When we place BCI and CCI together into our regression, the effects of both remain significant. An increase in BCI leads to an increase in GDP growth of 12.3 percent, while an increase in CCI leads to an increase in GDP growth of 22.5 percent. This suggests that confidence is vitally important to economic growth, which is consistent with the ideas of Acemoglu and Scott (1994) and Barsky and Sims (2012). Using panel data on 41 countries, we also find that this rule can be applied to various countries. When market participants become more optimistic on growth, the economy is more likely to experience an economic boom. Second, consumer confidence is more critical than business confidence. The coefficient of CCI, regressed alone or together with BCI, exceeds the coefficient of BCI by at least two standard deviations, implying that economic growth is more sensitive to changes in consumer confidence. This may explain the preference for consumer confidence in previous studies, including that of Acemoglu and Scott (1994) and Barsky and Sims (2012). However, the role of business confidence is also highly significant. When policymakers try to stimulate confidence, this should also involve stimulation of business confidence. Third, confidence affects economic growth through its two main components of consumption and investment. Carroll et al. (1994) and Acemoglu and Scott (1994) found that consumer confidence is useful for predicting consumption. We extend their work by adding the producer side. Thus, we study how consumption and investment react to both consumer and business confidence. Columns 4–6 of Table 2 exhibit how confidence affects consumption, while Columns 7–9 show the effect of confidence on investment. As shown in Columns 4–6, an increase in BCI or CCI alone leads to a substantial increase in consumption growth, by 16.9 percent and 48.4 percent, respectively; this implies that optimistic sentiment among consumers or producers can result in higher consumption. However, when we put both these into the regression, CCI remains significant while BCI does not. This suggests that consumer confidence plays a dominant role in consumption, while producer confidence may be less important. This result is consistent with those of Carroll et al. (1994) and Acemoglu and Scott (1994), who also emphasized the impact of consumer confidence on consumption. Moreover, we find that business confidence also substantially affects consumption, which sheds more light on the determination of consumption. Similarly, we find that BCI or CCI alone has a significant positive effect on investment, as can be seen in Columns 7–9. When we put both these into the regression, both BCI and CCI remain significant, which differs from the result for consumption. Although the coefficient of BCI remains almost unchanged, the coefficient of CCI decreases by more than one standard deviation after we put BCI into the regression. This means that the mood of producers is dominant in investment, while the mood of consumers also plays an important role. Overall, the findings shown in Table 2 suggest that both consumer and business confidence greatly affect economic growth because when agents feel more optimistic about the economy, they tend to decrease their precautionary savings and become more aggressive in consumption and investment. As a result, the economy improves owing to their optimistic behavior. We also find that consumer confidence dominates consumption, while business confidence dominates investment, which is consistent with economic sense. These findings have strong implications for policymakers. As both consumer and business confidence are crucial for economic growth, it is of vital importance for policymakers to take account of the confidence of consumers and producers. This is even more important in times of economic slack, because the lack of confidence during these periods may further discourage economic activity and lead to a deeper recession, as emphasized by Ilut and Saijo (2020). Similar actions have been taken by governments in various countries. After the financial crisis of 2007–2008, forward guidance has become an increasingly important tool of monetary policy (Gertler, 2017; Gokmenoglu & Hadood, 2019; McKay et al., 2016). When the economy hits its zero lower bound, there is no functional role for traditional monetary policy. However, forward guidance can change expectations and thus stimulate agents’ confidence, which will affect economic activity and eventually stimulate the economy without changing the current interest rate. The application of forward guidance proves the importance of confidence, which is also consistent with the idea of Barsky and Sims (2012) that confidence conveys incremental information regarding future economic activity. 4.2. The role of confidence in times of economic boom and recession The results presented in Table 2 show that the confidence of both consumers and producers has a great effect on economic growth. Our results emphasize the importance of confidence, which is highly consistent with previous studies (Acemoglu & Scott, 1994; Barsky & Sims, 2012). Although existing studies have conducted similar research, one important feature of confidence—its asymmetric effect—has been neglected. Confidence may have different effects on economic growth at different times. For example, when an economy experiences an economic slack, economic activities are greatly discouraged because of low levels of confidence; hence, a change of confidence may have a greater marginal effect. As Farmer (2012) has stressed, different levels of confidence can lead to different economic equilibria. To further explore this asymmetric effect, we next analyze whether this effect differs during an economic boom and an economic slack. The study sample is divided into two groups according to the GDP growth of each country to identify this asymmetric impact. Two methods are used for grouping. First, the GDP growth of all sample countries is sorted and the mean GDP growth for each year is measured. The mean growth of GDP can then be used to divide the sample into two groups: the group with GDP growth above the mean is labeled as the booming group and the other is labeled as the busting group. Second, the GDP growth is sorted and the time series mean for each country is measured, from which the sample is again divided into two groups, labeled in the same manner. Table 3 shows how confidence affects economic growth during economic boom and economic slack, using the GDP growth mean of all countries in each year as the grouping criteria. The following conclusions can be drawn. First, both BCI and CCI have a greater effect on economic growth during an economic slack. As shown in Columns 1 and 2, an increase in BCI leads to an increase in GDP growth of 5.9 percent during an economic boom, which is amplified to 15.6 percent during an economic slack. Similarly, CCI also has a greater effect on economic growth during economic slack: the effect of CCI on economic growth is 13.5 percent during an economic boom and 20.2 percent during an economic slack. For both BCI and CCI, the coefficient during an economic slack exceeds the coefficient during an economic boom by at least two standard deviations, confirming the difference between the two groups. The findings suggest that both forms of confidence (BCI and CCI) play an important role in determining economic growth, and that this is amplified during an economic slack, when confidence is more important. Table 3. Asymmetric effect of confidence on economic growth in boom and slack country. This table reports regressions of GDP growth (GDPG) on confidence during an economic boom and economic slack. The average GDP growth of all sample countries is calculated for each year. The BOOM country group means the country’s GDP growth is greater than the average GDP growth, and the SLACK country group means the country’s GDP growth is lower than the average GDP growth. BCI is the Business Confidence Indicator. CCI is the Consumer Confidence Indicator. Control Variables include Inflation, Industry, Trade, AgeDep, PopG, and DomSaving. Country fixed effect and year fixed effect are included. ∗, ∗∗, and ∗∗∗ indicate that the corresponding p-values are less than 0.10, 0.05, and 0.01, respectively. Second, BCI dominates during an economic boom, whereas CCI dominates during an economic slack. In Columns 5 and 6, we add both BCI and CCI into the regression. When GDP growth exceeds the mean growth of all countries, BCI plays an important role while CCI becomes insignificant; when GDP growth is lower than the mean growth of all countries, CCI plays an important role while BCI becomes insignificant. This may suggest that consumer and business confidence have different effects on economic growth. During an economic slack, simulating consumer confidence is more useful, while business confidence contributes more to economic growth during an economic boom. Next, we use the second method to define economic boom and economic slack. Instead of using the mean GDP growth of all countries in each year, we use the time series GDP growth mean for each country as the grouping criteria. Table 4 shows the results, from which the following conclusions are drawn. First, both BCI and CCI have a greater effect on economic growth during an economic slack. As shown in Columns 1 and 2, an increase in BCI leads to an increase of 3.2 percent during an economic boom and an increase of 16.9 percent during an economic slack. As shown in Columns 3 and 4, an increase in CCI leads to an increase of 11.1 percent during an economic boom and an increase of 25.5 percent during an economic slack. The variations of both BCI and CCI coefficients exceed two standard deviations, indicating a significant difference between the two groups. The findings suggest that when GDP growth is lower, confidence will be more effective in stimulating the economy, and this finding is robust across our two grouping criteria. Table 4. Asymmetric effect of confidence on economic growth in boom and slack period. This table reports the regressions of GDP growth (GDPG) on confidence during economic boom and slack. The average GDP growth of each sample country is calculated. The BOOM period group indicates the country’s GDP growth is greater than its average GDP growth. The SLACK period group indicates that the country’s GDP growth is lower than its average GDP growth. BCI is the Business Confidence Indicator. CCI is the Consumer Confidence Indicator. Control Variables include Inflation, Industry, Trade, AgeDep, PopG, and DomSaving. Country fixed effect and year fixed effect are included. ∗, ∗∗, and ∗∗∗ indicate that the corresponding p-values are less than 0.10, 0.05, and 0.01, respectively. Second, BCI dominates during an economic boom, while CCI dominates during an economic slack. In Columns 5 and 6, we put both BCI and CCI into our regression. When economic growth lies above its time series mean, BCI remains significant and CCI does not. Similarly, when economic growth lies below its time series mean, CCI remains significant and BCI does not. The findings also suggest the heterogeneous role of consumer and business confidence. Business confidence is more important during an economic boom, while consumer confidence is more important during an economic slack. These results are also consistent with those shown in Table 3. The results shown in Table 3, Table 4 together prove that both consumer and business confidence are more essential during an economic slack, which is highly relevant for policy and has strong implications for policymakers. Confidence is more important during an economic slack because agents have pessimistic expectations and engage in conservative behaviors in consumption and investment, which makes the economy more sensitive to confidence changes. Ilut and Saijo (2020) pointed out that a lack of confidence can further discourage economic activities, which will trigger a feedback loop and lead the economy into a deeper recession. Zhang (2017) also found that by shutting down the confidence channel, the effect of uncertainty shocks is greatly dampened and less persistent. We echo their idea with support from empirical evidence.

The term “confidence” is often used in relation to economic issues, and has been increasingly discussed in the media and by policy makers since the 2008 global financial crisis. However, the question remains of whether confidence actually affects economic growth. Using panel data on 41 countries from 1991 to 2017, we study how consumer and business confidence affect economic growth. We find that confidence positively affects economic growth, and that this effect is amplified during recessions and in low-confidence situations. Further analysis shows that confidence has a greater effect during recessions by amplifying the effect of monetary and fiscal policies. The results of generalized method of moments analysis prove the robustness of the main findings. In general, our study reveals that confidence plays a significant role in the economy, thus supporting the notion that governments should give more consideration to confidence when trying to stimulate the economy.

IT IS widely recognised that business confidence, and the predictions for the future, play a key role in economic developments. When confidence is low, businesses are less likely to invest and so economic growth will be lower. On the other hand, when confidence is high it generally leads to an increase in the number of businesses investing in R&D, staff and technology. The knock-on effect to other businesses in the supply chain can see gross domestic product (GDP) soar. Although there are many different types of business confidence index, the data they produce offers a good barometer of how the country's key decision-makers are thinking and feeling. This is invaluable insight for any business owner or manager looking to plan for the future, therefore shaping our economic outlook. Many believe that one of the major drivers of change to business confidence levels is uncertainty. That's why I was particularly pleased that business confidence in Wales has soared into positive territory, as the uncertainty over the past few years starts to settle and economic prospects for the country brighten. Sentiment tracked by our most recent Business Confidence Monitor (BCM) last month shows confidence in Wales has reached its highest point for two years and is also well above the country's historical average at 18.4 on the index for Q1 2024, a significant increase from minus 6.7 in the previous quarter. At a UK level, business confidence more than tripled to 14.4 on the index, surpassing the pre-pandemic average for the first time in two years, as economic conditions improved. The boost was likely underpinned by positive sales and exports projections for the next 12 months. These latest findings from our Business Confidence Monitor report will be the topic of discussion at our upcoming economic summit on May 14. This virtual event will bring together experts from across the UK and its devolved nations to discuss the current economic environment, and what it means for the future of UK business. Huw Pill, chief economist for the Bank of England, will headline our plenary session, facilitated by Iain Wright, ICAEW managing director. Our regional break-out discussions, representing all UK economic regions and the devolved nations, will then focus on the Business Confidence Monitor's regional findings and consider how the regional landscape compares against the national picture. I am delighted that Kellie Beirne, chief executive of Cardiff Capital Region, will be joining me for the break-out discussion for Wales. With responsibility for overseeing a range of investment funds including the City Deal and investment one, Kellie is a passionate advocate of nurturing the best conditions for business success and community cohesion. She will explore local economic conditions, share insights into how businesses have adapted and even thrived in response to key universal challenges. We'll also look ahead with a keen eye on the future and the opportunities for regional and local economies. How are local businesses adapting and responding to the availability of technology to drive productivity? And how will businesses operating in local and regional markets shape the macro-economy of the future? I have no doubt that the insights and analysis will undoubtedly shed light on the challenges and opportunities that lie ahead, empowering us all with the knowledge and foresight to make informed decisions and adapt to the evolving economic conditions. I am also hoping we can learn new strategies for managing economic uncertainty and how to harness opportunities to build business resilience as this is what will build confidence in our economy. In the meantime, I hope that the lift in confidence reported by our most recent Business Confidence Monitor for Wales is a reflection of businesses' optimism that the tide has turned and prospects are set to improve for us all. ¦ Robert Lloyd Griffiths is Wales director for the ICAEW

“The small business sector is responsible for the production of over 40% of GDP and employment, a crucial portion of the economy,” said NFIB Chief Economist Bill Dunkelberg. “But for 29 consecutive months, small business owners have expressed historically low optimism and their views about future business conditions are at the worst levels seen in 50 years. Small business owners need relief as inflation has not eased much on Main Street.”

The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize the dramatic change in small-business sentiment that accompanied the Great Financial Crisis and the COVID-19 pandemic. Compare, for example, the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings following the Great Recession that ended in June 2009. Over the last few years, as a result of the COVID pandemic and high inflation, small business sentiment closely resembles that of the Great Recession and its aftermath.

It needs to be understood that while supposedly targeting so-called “Big Tech,” these intrusive regulations and substantial costs would fall on competitors as well, thereby actually discouraging competition in technology markets. For good measure, moving ahead with his kind of hyper-antitrust regulation of tech firms lays the groundwork for doing so in other industries, such as in retail, energy, health and medical sectors, and so on. This is what Senate anti-trust crusaders hope to accomplish.

The message is clear: Beware entrepreneurs, businesses and investors if you become too successful or if you cross certain political constituencies. The government stands ready to punish you via intrusive and costly regulation.

Antitrust is a hot topic in Washington lately. The pervasive reach of big technology companies into our personal lives and economy has drawn the attention and ire of both Democrats and Republicans in Congress, but for different reasons. Many Democrats are increasingly wary of the size, power and reach of these companies and the effects they have on competition. Meanwhile, many Republicans are more concerned about what they see as aggressive censorship of conservative thought online, some seeing it as a violation of the First Amendment. In response to these concerns, the Senate Judiciary Committee, led by Amy Klobuchar (D-MN) and Chuck Grassley (R-IA), has voted to advance the . The committee’s House counterpart has also considered a similar bill. In the Senate, the bill is expected to get a floor vote in the coming year, with plenty of jockeying still to unfold. But, will this legislation really solve these problems? Are they real problems in the first place? To what extent is this bill more about politics than adopting good policy? While those questions need answers, a deeper dive into bills like AICO reveals a darker picture that every American—and conservatives in particular—should be concerned about: a transfer of authority away from private businesses to the progressive fringe within an administration that has long had big tech in its crosshairs, but has recently been more brazen about it. Just a few weeks ago, White House Press Secretary Jen Psaki called on audio streaming apps like Spotify to to combat so-called “misinformation” on its platform. The timing seems ironic, as millions relied on big tech companies during the COVID-19 pandemic when Americans were forced to do almost everything online from home, and during a time when international political and economic instability seemed to be rising as well. At the forefront of the administration’s effort to crack down on Big Tech is the Federal Trade Commission (FTC), led by Chair Lina Kahn. Kahn has been vocal about her views on what one of the missions for the FTC should be—to make our society more through punitive actions against market manipulators, however she may define manipulation. As agencies are given wide leeway to interpret the intent of Congress as they implement legislation, and since courts are generally deferential to agency interpretation, it is reasonable to assume that the effects of this legislation would impact a broad array of services that Americans rely upon. Klobuchar claims that her bill will give FTC the authority to beef up antitrust enforcement, protect consumers from companies thwarting competition, limit the size of mergers and acquisitions, and make it illegal for firms to use their platforms to advantage their own products or those of their partners. For vertically integrated companies like Amazon and Google, that amounts to the government taking substantial control over key aspects of their day-to-day operations, as well as growth strategies, domestic and global. It essentially penalizes American companies for being too successful. But why is that a problem? The battle between Walmart and Amazon to expand their market share has resulted in the proliferation of product offerings and services at lower prices and with greater convenience for consumers at all income levels. These companies didn’t do this by leveraging legal loopholes or using immoral tactics. They achieved their success through innovation and by creating extraordinary products and services that Americans have come to love and enjoy in our everyday lives. Consider Google Maps for instance. Do you like it when Google shows you the nearest location of a restaurant you want to try? Or think about your Amazon Prime Membership? Two-day shipping on a large swathe of products makes it fast and easy for consumers to get what they want, when they want it. Both of these services would become illegal under the statute of “self-preferencing”—a sales tactic that has been in use for literally 100 years. Of course, consumers are free to abstain from these services altogether. The bottom line is clear: Klobuchar’s bill means less choice and convenience for consumers, the likelihood of higher prices, and more power in the hands of a government to pick and choose winners and losers in the economy. Far from fixing any real problems, the bill is little more than a trojan horse for progressive policies that affect the largest companies in our country simply because some in Congress think they are too powerful. By appealing to conservatives’ concerns about censorship, progressives have cobbled together a coalition under a cloak of updating antitrust law that might just succeed. Congress should step back and view this effort for what it really is: a massive extension of government control into the private sector with potential for disastrous impacts for consumers. Congress should not pick winners and losers by giving bureaucrats free rein to centrally plan the economy. This is why, in our history, antitrust law has been used judiciously due to its outsized impact on the economy. The free-market principles that define the American system have been proven over and over again to promote innovation, value, and vast consumer choice. Government must establish an environment where business can grow and prosper, not handcuff and punish them for success.

The surge in business and consumer sentiment reflects an assumption that is deeply rooted in the American psyche: that deregulation and tax cuts always unleash transformative pro-growth entrepreneurship. (To some outside the US, it is an assumption that sometimes looks a lot like blind faith.)

Of course, sentiment can go in both directions. Just as a “pro-business” stance like Trump’s can boost confidence, perhaps even excessively, the perception that a leader is “anti-business” can cause confidence to fall. Because sentiment can influence actual behavior, these shifts can have far-reaching impacts.