What's Stunting Small Business Growth?
The National Federation of Independent Businesses reported Tuesday that its Index of Small Business Optimism hit a two year low.
According to the organization:
“Spending and hiring plans weakened a bit as expectations for growth in real sales volumes fell. Earnings trends also weakened as owners continued to report widespread gains in worker compensation while holding the line on price increases. More firms reduced prices than raised them, a sign that small businesses are finding ways to absorb higher labor costs without affecting consumers. Also, the political climate continued to be the second most frequently cited reason for reluctance to expand. Expectations for future business conditions remained very negative, which indicates that small business owners do not plan to increase hiring or capital spending.”
The NFIB’s Chief Economist William Dunkelberg blames political uncertainty and “dithering” by the Fed on interest rates.
“Small businesses are still waiting for a good reason to invest in the future,” he said.
The 42-year-old- index has closely mirrored economic activity in the U.S. And although it has risen during the past few years, a history of this metric shows that small business confidence has never recovered to the levels it once was prior to 2005. The average index over its lifetime is about 98 (its all-time highs back in the mid-2000’s surpassed 105) and this month it came in at 92.9.
You can blame the slow economy of course. Or gridlock in Washington. You can blame the “political climate” as many do. Quite a few of my small business clients point their fingers at higher taxes and more regulations that they’ve had to deal with over the past few years. And yet, there is conflicting data too.
For example, a February 2016 study from Sageworks, a research firm, found that businesses with less than $5 million in annual revenue experienced, on average, a 7.8 percent annual sales growth during 2015, an increase of nearly a full percentage point from the previous year, and their net profits rose to 7.5 percent from 6.4 percent of revenues–the fourth consecutive year of improvement. Recent reports from Wells Fargo to The Hartford say that small businesses are confident, feeling successful and optimistic. And just last week payroll firm ADP said that small business hiring increased by 76,000 last month and financial services firm CBIZ said its monthly employment index rose slightly although “small business owners were still skeptical about building workforces given the economic climate.” Interest, inflation and unemployment are at near historical lows. Capital is readily available. Inexpensive technology today enables even the smallest of companies to operate as if it were a Fortune 500 firm.
Who to believe? Are small businesses doing OK or not? The answer is….yes. And no. Many are doing OK. Many are not.
If you’re running a pizza shop or you’re a merchant or a plumber or the owner of a gas station and you’re located in Washington DC, San Francisco, New York City, Miami or many other parts of the country that are growing and doing well -- then you’re doing well. If you’re an owner located in parts of North Dakota, Texas, Louisiana or sections of Florida, then the past couple of years haven’t been great. It matters what industry you’re in. It matters what industry your clientele is in. A dry cleaner located in a neighborhood full of college professors or tech people will do better than the same business located in an area populated by unemployed energy workers or with an eroding manufacturing base. It’s very tough to make an assessment about the “state of small business” when there are more than 28 million of them in this country alone.
But there’s one statistic that’s revealing. It has to do with demographics. The average age of the typical small business owner is 51.7 years old. That age has been rising and will continue to rise, particularly as fewer Millennials are starting companies than the generation before them. Currently, only 8% of Millennials own a business, 16% are making plans to start a business, and 27% want to start one someday but have no current plans to do so, says a February research study. Where are the Millennials, who make up the largest part of our population? They’re busy paying off their student loans, according to that same study.
You know what happens when people get older? Like me, they become more conservative with their money. We spend less. We take less risks. We save and we hoard for retirement, even when the economy is in decent shape. So when will small businesses take more risks, make more investments, hire more people? When can we expect to see the NFIB’s index reach those levels not seen in more than a decade? As I see it, that’ll be when a younger generation takes up the helm. And we’re just not seeing that yet.