Does the presidential election take a bite out of small businesses?
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Does the presidential election take a bite out of small businesses?
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Listener Tamarra Kemsley from Claremont, California, asks:
The small businesses in my neighborhood say that sales drop considerably during presidential election years. My realtor said something similar can be seen in the real estate market, with fewer home buyers placing their homes up for sale. Why is that?
A majority of voters are concerned about the upcoming presidential election’s impact on the economy.
But despite their anxiety, election years do not negatively impact the real estate market or small businesses, according to experts. Instead, the time of year, the unemployment rate and interest rates influence sales.
Higher rates mean the cost of borrowing goes up, which translates to higher auto, credit card and mortgage rates. That in turn can weaken consumer spending.
“A rise in interest rates depresses all kinds of investment, including investing in buying a home,” said Edward Coulson, an economics professor at the University of California, Irvine, and the director of the school’s Center for Real Estate.
Home sales are also seasonal and generally decline in the colder months, because “you don’t want to go house shopping in the middle of a blizzard,” Coulson said. Plus, parents want stability as the school year begins.
This year has been hectic for Stacie Crumbaker, an agent in Claremont who currently has eight listings. Housing shortages and lower rates mean that demand is outpacing supply. The average rate on a 30-year mortgage has steadily declined this year in anticipation of a rate cut, from 7.22% in May to 6.08% this week
“I haven’t had any clients have any issues with listing their home in an election year or close to an election,” Crumbaker said.
In 2020, 822,000 new, single-family homes sold in the U.S, compared to 683,000 homes the previous year. In 2016, there were 561,000 new homes sales compared to 501,000 in 2015, according to data from the U.S. Census Bureau.
One study found that in nonelection years, new home sales decline by 14%, on average, in the five months leading up to November compared to the year before. Meanwhile, existing home sales decline by 22%, according to the analysis from researchers at John Burns Research & Consulting.
But during election years, sales don’t fare any worse. New home sales decline by an average of 10% for that same period, while existing home sales decline by 19%.
Presidential election years actually have a positive impact on the housing market in the Washington, D.C. metro area, according to Nadia Evangelou, a senior economist at the National Association of Realtors. She tracked existing home sales in the area between November and March from 1988 to 2015. Home sales rose 10% the year before an election, 12% the year of the election, and 10% the year after.
“The cyclical nature of political transitions and the influx of new staff to Washington, D.C., typically leads to a surge in home buying, selling and rental activity in the local market,” Evangelou said.
Those political transitions are reflected in nationwide housing data, Evangelou said. Nationwide, home sales increased an average of 1.5% the year before an election, 3.4% the year of the election, and 7.2% the year after elections, according to Evangelou’s study.
When it comes to small businesses, experts don’t think presidential election years negatively impact sales.
They didn’t have any data showing the connection between these time periods and small businesses specifically. But we know that median real gross domestic product growth is 1.25 percentage points higher during presidential election years compared to nonelection years thanks to a 2016 study from economists at Wells Fargo Securities.
That same study also found that median real spending is 1 percentage point higher in presidential election years compared to nonelection years.
There is increased uncertainty, which means some people could be saving more and spending less on small businesses as a result, said Frank Fossen, an economics professor at the University of Nevada, Reno.
But their savings aren’t large enough to affect business activity, Fossen added.
“The election happens every four years. It’s very regular, it’s not coming as a surprise,” he said.
Instead, interest rates and changes in the employment rate generally affect small business sales. As unemployment rises, consumers have less to spend, and vice versa, Fossen said.
Even then, there isn’t always a clear link between interest rates and spending. Despite high interest rates, consumer spending increased by 0.8% back in March, and rose 0.2% last month. (As The Atlantic put it, the economy has been acting “very, very weird” since the pandemic began.)
But still, some small businesses are “feeling a slowdown,” said Holly Wade, executive director of research at the National Federation of Independent Business.
Which is why they’re probably welcoming the latest rate cut. The Federal Reserve recently slashed interest rates by 50 basis points, its first cut in four years.
That can spur spending, or at least prevent people from pulling back, which will help small businesses, Wade said.
The rate cut will also help owners who are looking for cheaper financing to expand their business, Wade said.
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