Late last year, forecasters issued warnings about a possible economic slowdown based on early signs of weakness in major sectors like manufacturing and agriculture. Today brings another downturn prediction, this time from Yelp.

Over the last quarter, the Yelp Economic Average, which measures the activity of millions of small businesses that have a presence on the online reviews site, declined by more than two points, from 100.7 to 98.5. This is the largest decline since the fourth quarter of 2016, according to Yelp, and largely due to declines in the professional, home, and local services sectors.

Nearly all 30 categories within these sectors were down in the fourth quarter, which Yelp says is an early indicator of an economic slowdown. These categories represent a wide swath of the local economy and include businesses like office cleaning services, restaurants, auto repair, and sporting goods stores.

"A lot of these services are things that we can be flexible about when we... pay for [them]," says Carl Bialik, Yelp's data science editor. "The time to start paying a professional is when you have enough cash to do this." In other words, consumers are starting to rein in their spending on nonessential expenditures. 

Bialik offered additional reasons for the decline in certain sectors. For instance, the slowness in computer-related businesses--computer repair and IT--may be partially the result of Americans spending more time on their phones to accomplish a greater number of tasks. Sandwiches and baked-goods businesses also saw a dip; the increased availability of gluten-free food may explain why consumers are less interested in traditional sources of bread-based products. Meanwhile, business is up at gas stations, which Bialik says is a category less sensitive to short-term trends.

Yelp's Average aims to measure the local economy by analyzing the composite score of both the number of businesses and level of consumer interest across 30 business categories on its platform. The data is all sourced from its platform, with consumer interest measured via page views, reviews, and check-ins at establishments. Yelp says it has listings for millions of U.S. businesses (it won't disclose exactly how many), and 34 million monthly app users and 75 million monthly mobile users. 

"Each [business] is not a major share of the U.S. economy, but together, they are where so much business gets done [and] where people find the services they need in their communities," Bialik says.

Yelp also broke down the data geographically, showing some bright spots of economic activity amid the slowness. Albuquerque has seen gains, which the city explains by pointing to a recent initiative to support local businesses over out-of-state corporations for city contracts. Meanwhile, Milwaukee is seeing growth, especially in its real estate sector, which Bialik says may account for more office workers and more consumer spending.

Yelp's Average is unique in that the company has access to granular data on consumer activity across sectors that many public companies don't have. "There's no question that this is an interesting source of data that is beyond our usual metric of how the economy is doing," says David Hsu, Wharton's professor of management who focuses on entrepreneurial innovation.

On the other hand, Hsu cautions that the data may not be as representative as it seems for the whole economy. The companies listed on Yelp are largely consumer-facing, which could leave out many business-to-business companies, and early-stage startups that can be big entrants to economic growth, says Hsu. In addition, consumer-facing companies often go through boom-and-bust cycles.

Harvard Business School researchers concluded in a 2017 study that platforms like Yelp work best when combined with official government statistics to give a more complete view of the local economy.

"[Yelp's average] is a new source of data and is a valuable source--but it has to be analyzed so you're not basically crowning it as the new source," says Ari Ginsberg, a professor of entrepreneurship and management at New York University's Stern School of Business.

Still, Yelp's prediction is just one of many recent reports suggesting a downturn is coming. The Congressional Budget Office predicted growth would slow to 2.3 percent this year (down from 3.1 percent in 2018), and then slide to 1.7 percent in 2020. A survey of more than 1,300 CEOs around the world showed that nearly 30 percent of them believe global growth will decline in the next 12 months. And nearly half of the U.S.'s chief financial officers believe the nation will enter a recession by end of 2019

Published on: Jan 31, 2019