November 21, 2022 | Last Updated on: January 27, 2023
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With the 2022 midterm elections all wrapped up, there isn’t any more uncertainty about who controls the House of Representatives (Republicans) or the Senate (Democrats). But what this means for small businesses remains to be seen, and in this article, we take a deeper look at the results of the election and how the economy and small businesses may be affected.
The most relevant data point currently stemming from the 2022 midterm elections is that we have a divided government—where one party remains in control of the executive branch, or presidency, and a different party controls at least one of the legislative branches (the Senate or the House).
It is not uncommon for a country to operate with a divided government, in fact, historically divided governments tend to be more productive than unified governments, even if a lot of gridlock does occur.
Elections that happen in the middle of presidential election terms, like the most recent election on November 8, 2022, are called midterm elections. The results affect the agenda of the sitting president, currently President Joe Biden, because they determine whether or not the presidential party will retain control over Congress. If the President’s party doesn’t win the majority of seats in both chambers during the election, pursuing their presidential agenda may become more difficult. Prior to the 2022 Midterm election, President Joe Biden’s Democratic party controlled both chambers of Congress.
The House of Representatives, which is called the lower chamber of the federal congress, hosts 435 seats that are re-elected every two years. Seats are designated based on population size for each of the states in the United States, so well-populated areas, like California, have more seats than less-populated states, like Arizona. The seats in the House have no term limits, so re-election every two years does not mean all fresh faces in the House.
The Senate is called the upper chamber of the federal congress. At the Senate, there are two seats for every state, so there are 100 seats total. The terms for holding office are six years, and during even-numbered years, like 2022, about one-third of the seats are re-elected in the senate race.
A third political office affected by midterm elections is Governor. While they are not part of congress, the political party of each Governor has the potential to affect future elections.
In the last three years, Americans have faced a pandemic, a war between Russia and Ukraine, global supply chain disruptions, and record-high inflationary rates. Many individuals, business owners, investors, and lawmakers looked to the 2022 midterm election to improve the current economic situation in our country. Leading up to the 2022 Midterm election, the areas of focus in the economy included the following.
The national debt ceiling, or debt limit, determines the amount of money the U.S. Treasury Department can borrow. Funds borrowed by the Federal Government supplement the revenue collected through income taxes so that the government can cover its operational obligations, which include military salaries, tax refunds, Social Security and Medicare benefits, and service national debt. The national debt is currently greater than $29 trillion. In December 2021, the federal debt ceiling was raised by $2.5 trillion, which allowed the United States to avoid defaulting on its outstanding debt.
To make sure the United States can continue to borrow the funds it requires to function, the ceiling will need to be raised again. Since disclosures of the 2022 Midterm election were made public, there is a conflict between the Republican and Democratic parties regarding the debt ceiling. House Republicans have indicated that they will be pushing for the debt limit to be raised again and will offer decreased spending budgets in return.
If the debt ceiling is not raised, however, financial analysts are concerned that it could damage the credit rating of the country. CNN reported, that in 2011, during President Obama’s term, the country experienced a similar gridlock, which resulted in the U.S. losing its perfect Standard and Poor (S&P) rating. The damage to the AAA credit rating caused stocks to drop more than 5%.
While the debt ceiling affects the amount of money the Federal Government has for Social Security benefits, it is not the only factor that matters. Consumer confidence, which controls consumer spending, is affected directly by benefit program initiatives. In both Republican and Democratic conversations, there is concern about the long-term solvency issues for programs like Social Security and Medicare. Democratic Senator Joe Manchin, stood out from his Democratic peers in the 2022 Midterm Elections, as he was asking for a compromise regarding Social Security and referred to the program as “going bankrupt.” Republican Senator Rick Scott, also spoke out about Social Security, proposing that the programs undergo a renewal vote every two years.
The Federal Reserve continued to be a hot topic in the news during 2022, as the Feds continued to raise interest rates. Policymakers at the U.S. Central Bank raise the Federal Funds rate, which increases interest rates, as a means of fighting inflation. The higher rates slow down movement in the economy and limit borrowing power, but they also negatively impact consumer spending and the cost of living.
The rate hikes imposed by the Federal Reserve were a topic of debate for both political parties. Democratic Senators, like Elizabeth Warren and John Hickenlooper, are pleading with Fed Chair Jerome Powell to slow the pace of the increases. Republicans, led by Senator Pat Toomey, also weighed in on the Federal Reserve’s rate hikes, asking Powell to stop buying government debt.
Voters across America, along with both Democratic and Republican leaders, were anxious about how the 2022 Midterm Elections would affect the stock market and other investments, like the bond market. Following the market reports of the October stock slump, overall activity is declining in the stock market. Under the Biden administration, the S&P 500 has decreased 1.2%. According to CFRA, independent market researchers, the stock market has not been so discouraging since former President Jimmy Carter was in office.
While the party that controls the U.S. House doesn’t determine future activity in the stock market, it can influence it. Depending on how investors feel the President’s party is doing at leading the economy, having a divided government can either help or hinder the stock market. Ultimately, it comes down to whether individual companies and investors believe government choices will be good for them or not.
Before the November elections, President Joe Biden announced a potential windfall tax on Big Oil companies that were profiting from increased fuel prices. Republicans are not typically in favor of tax increases for corporations and wealthy individuals, so the results of the Midterm Elections will determine whether Biden can impose the new tax. Individuals were also hopeful that the results of the November election may bring tax cuts and additional tax credits for the American people, which are also less likely if the House is controlled by Republicans.
Every time there is a midterm election, the direction of federal policy changes because the bipartisan control of Congress shifts. With the election over and a divided government as the outcome, small business owners can expect to see the greatest impacts in the areas of inflation, the labor market, and supply chain.
One-third of voters polled prior to the midterm election listed inflation, or the economic trend of rising prices, as their most critical campaign concern. Small business owners are certainly among the masses concerned about inflation and how it will affect profits during the next year. While many entrepreneurs reported increased revenues during the first three quarters of 2022, they also reported shrinking profits. Shrinking profits are due to the increased cost of goods, services, and shipping. In addition to rising operational costs, entrepreneurs with variable interest rate loans are experiencing higher monthly payments.
The Inflation Reduction Act (IRA) of 2022 was signed into law by President Joe Biden on August 16, 2022. The law entered budget reconciliation by the Senate Democrats, so it only required a Senate majority vote to pass legislation. The law was made as an effort to fight inflation, reduce the debt deficit, and cut healthcare costs for senior citizens. Since passing the law, Biden attributes slowed price increases as an indication the economic plan is working as intended. Seeming encouraged by the bipartisan results of the midterm election, Biden said that “I will work with anyone, Democrat or Republican, on ideas to provide more breathing room to middle-class and working families.”
The midterm elections brought out a lot of discussion about wages in the United States. While many politicians on both the Democratic and Republican sides believe wages are not high enough to combat the increased costs of living, many others disagree and feel increasing the minimum wage will counteract efforts to fight inflation. Voters in Nebraska, Nevada, and Washington D.C. each saw ballot issues addressing wage increases in their states, with Nebraska and Washington D.C. receiving a victory. The results for Nevada have not been fully concluded, but is reported that 54% of the votes indicating approval.
Increased wage demands can be hard for small business owners to meet, often being forced to decide between layoffs and increasing wages. In 2022, many businesses are still experiencing labor shortages due to an insufficient labor force in the economy, employees not accepting current market wages, and the desire to work remotely without losing wages or benefits.
The NFIB reported that 32% of small business owners said supply chain issues have had a significant impact on their business. The supply chain represents all manufacturers, producers, suppliers, distributors, shippers, and sellers. The current supply chain issues began as a result of COVID-19 creating labor shortages and plant closures. Rising prices for small business owners soon followed as a way for suppliers to offset their own increasing costs.
Supply chain disruptions affect inflation as rising prices contribute to a higher Consumer Price Index (CPI) and overall higher inflationary rates. With the midterm election completed and a divided government in place, the impact political leaders will have on supply chain issues is still unknown. Economists are hopeful that as increasing costs slow down, the supply chain will begin to function at pre-pandemic paces. However, even before the pandemic, there was a labor shortage in some areas of the supply chain, including the trucking industry.
Former vice president, Mike Pence, may have said it best when he told ABC News, New York, “elections are about the future.” As small business owners prepare for their futures, they can protect their bottom lines by taking steps to prepare for a possible recession and cope with supply chain and inflation issues.
If business cash flow is a concern due to increased operating expenses and decreased sales, consider a fixed interest small business loan from Biz2Credit, like entrepreneur Danny Star was able to secure.
March 20, 2023
