A new survey from PNC Bank caught my eye. The semi-annual report claims that small businesses are “still optimistic, despite inflation and recession worries.” Ah, how sweet.
I love that some small business owners are always looking at the bright side. We are truly a glass-is-half-full bunch. There will always be some pockets of growth, as would be expected in a country this size. But unfortunately, I’m not so optimistic. And I don’t expect this optimism amongst my colleagues to last very long. That’s because although the pandemic may be over, many struggles remain for America’s small businesses over the next 12 months.
For example, inflation will continue to persist. Thanks to fiscal and monetary mismanagement as well as lingering supply chain problems, producer prices remain at an elevated (close to 9%) annual level. The prices for core products across industries - from industrial chemicals to construction materials to fertilizer - are still clocking in with double-digit increases over the past two years. Out of COVID-19 fears (and population manipulation), China is willing to shut down swaths of its country when someone has the sniffles and trillions of dollars are still washing around our banking system chasing too little demand. As a result, my clients are bracing for higher costs and continued supply chain issues for most of 2023.
Oil prices have fallen, but many don’t expect that to last. Russia’s recent setbacks in Ukraine will only cause retaliation by its leaders and not only means militarily but an expected strangling of oil supplies to Europe, all having an enormous impact on the supply of this core product throughout the world. The Biden administration’s obsession with green energy is strangling the very industries that can provide us with the supplies we need right now. Most of my clients in the travel, transportation, manufacturing and distribution industries are already bracing for higher utility costs this winter and understand that the price of a gallon of gas - down recently but still up almost 200% over the past two years - can easily revert to the historically high levels we saw this past spring.
Interest rates are poised to jump. Mortgage rates are already above 6% and commercial loans are being offered by traditional banks and other lenders to small businesses at rates ranging from 6 to 17% – levels not seen in recent memory. Global venture capital funding is already at a two-year low. Large banks are cutting back on the loans they’re extending to their smaller customers and as the Fed prepares to boost their core lending rates by another 75 to 100 basis points my clients are expecting the cost of capital, which includes rates for property, construction, leasing, equipment financing and even credit cards to increase significantly this year.
Clearly, we’re in a recession. GDP has been negative the past two quarters and consensus predictions are for zero to nominal growth in this one. Industrial production, manufacturing demand, and builder and housing markets are in decline. And although up slightly from prior months, both consumer confidence and small business optimism (according to the National Federation of Independent Businesses) remain at historically low levels. Personal income has been stagnant over the past two years and stock indexes are down 20% since January. There’s definitely a pall over the business community right now, a desire to play defense and avoid taking risks, spending money or investing capital.
Labor will remain in short supply. Even with the tech, real estate and financial services industries laying off tens of thousands of workers - and as many as 50% of other businesses considering the same - the number of both skilled and hourly workers will remain very elevated. Real immigration reform seems impossible in gridlocked Washington. Technology remains our best answer, but this requires investment and risk-taking where this is currently low appetite and many consumers still resist automation like self-checkout at merchants.
A pro-labor administration will continue to embolden workers’ demands. Unions have the power not seen in decades. Upcoming regulations from the Labor Department will force many businesses to reclassify their less costly independent contractors to more costly employees, limit how “joint employer” businesses use temp firms and freelancers and increase overtime pay. New controls over the fast food industry in California may raise minimum wages to as much as $22 per hour and will likely be a model for other blue states, affecting many small companies. Local authorities across the country are passing new regulations on non-compete clauses, pay transparency, drug testing, mandated discrimination and harassment training, job postings, predictive scheduling requirements and whether or not they can accept cash.
On the positive side, the mid-term elections will have little effect on our companies. Regardless of which party “controls” Congress, most pollsters agree that the margin will likely be razor thin, with neither party having a mandate to do much damage. Like my dad - a small business owner - used to say, the less the government does, the better!
Small businesses may be more optimistic this quarter, but let’s see what PNC reports six months from now. I’m expecting a much different result.
• Gene Marks is a CPA and owner of The Marks Group, a technology and financial management consulting firm specializing in small- and medium-sized companies.