If this year has been all about interest rates, next year is all about the consumer.

Rising interest rates were a shock for small businesses in 2023, climbing from 3.25% in early 2022 to 8.5% – a 20-year high. As a result, many of my small business clients – who usually pay a few points above prime if they can get the financing at all – found themselves unable to afford the capital they needed to grow while many others faced a credit tightening.

This coming year will be much of the same, but the interest rate problem will probably abate, as the Fed responds to a slowing economy. But that will present a new problem for small business. Why will the economy slow? Because of a pullback in consumer spending.

There’s a lot of data to follow when trying to predict an economy, but everyone knows this truth: ultimately an economy rides on the shoulders of the consumer. Whether a business manufacturers corrugated containers or gaskets, or sells pizza and gyros, or cleans offices or paints drywall – in the end all products ultimately get bought by the consumer.

In 2023, and despite high interest rates, sticky inflation, wars, political uncertainty and volatile energy prices, the American consumer kept spending. Retail sales throughout the year grew to an all-time high. The US economy in the fourth quarter grew at a smoking hot 5.2%. Black Friday, Small Business Saturday and Cyber Monday sales hit records. Big businesses logged higher-than-ever profits and many small businesses still find themselves desperately looking for more workers to help fulfill demand. Economically, it’s been a pretty darn good year.

But the consumer can’t keep spending forever. And unfortunately, there are ominous signs that the attitudes are already shifting.

Retail sales and consumer spending slowed in October. Consumer confidence – according to the University of Michigan’s closely watched indicator – dropped for the fourth month in a row. Small business confidence remains in the cellar. Retailers are getting nervous.

“Consumers are bringing up pressures like higher interest rates, increased credit card debt, and reduced savings rates [that] have left them with less discretionary income, forcing them to make tradeoffs,” reported Brian Cornell, Target’s CEO.

“Similar to the second quarter, we saw continued customer engagement with smaller projects, and experienced pressure in certain big-ticket, discretionary categories,” said Home Depot’s CEO, Ted Decker.

More concerning, credit card delinquencies are up and so are late payments for auto loans. Household debt is at a historical high. Record high housing unaffordability is taking its toll in the form of 30-year lows in home sales. Markets are up, but saving rates are down. The Conference Board’s closely watched leading indicators are also trending down, led by softening consumer confidence and a deterioration in new orders. Bankers are retreating both on business loans and credit card financings.