The new administration in D.C. hit the ground running, putting everyone off balance and trying to keep up. Every day the President is playing in someone else’s sandbox looking to recover some misdirected spending. And there is plenty of that in Washington to find. This has put a lot of business owners on edge, wondering what the impact of all these policy changes will be, and how it will impact the economy and their firms.
For small business owners, the top issues are labor quality, inflation, and taxes. In February, 19% cited labor quality, 16% reported inflation as their single most important problem, and 16% reported taxes. Preserving the Tax Cuts and Jobs Act (TCJA) provisions that are set to expire in 2025 would ease the burden of the scheduled tax increase on small businesses. Complaints about inflation (a tax) are really about the 20% cumulative increase in the price level (CPI) since 2021 which hasn’t declined, so prices just stay high. In February, 89% of the small business owners hiring or trying to hire reported few or no qualified applicants for their open positions. Almost 1-in-5 small businesses report that labor quality is their single biggest problem in operating their business.
For consumers, uncertainty appears to be dampening spirits. The University of Michigan’s Index of Consumer Sentiment has recently declined, falling from 70.5 to 64.7 between last October and February of this year. Young people (those between 18 to 35 years old) lost ground, falling from 75.5 in October of last year to 71.2 in January. Politics mattered, with Democrats dropping 40 percentage points in their Index (between October and January) while Republicans posted at 33-point gain.
Most firms want to grow, and to accomplish their growth goals they invest money in plants, equipment, and training. Willingness to do this requires small business owners to be confident that the investments will “payoff,” in other words that sales and profits will materialize. This is a forecast that the owner believes. Uncertainty is the inability of an owner to give a directional forecast (higher/lower, faster/slower, up/down, easier/harder, etc.). If the owner can’t give a directional answer, he/she is uncertain. Uncertain owners cannot and will not make spending and hiring decisions that propel (or slow) growth.
The National Federation of Independent Business (NFIB) has surveyed its membership of approximately 300,000 firms since 1973 (monthly since 1986), asking forward looking questions about plans and about backward looking questions about past decisions. NFIB’s Uncertainty Index is based on the percent of small business owners responding “I don’t know” or “uncertain” to the following six questions:
1. Do you think the next three months will be a good time for small businesses to expand substantially?
2. About the economy in general, do you think six months from now general business conditions will be better than they are now, about the same, or worse?
3. Overall, what do you expect to happen to the volume of goods and/or services (number of customers, units, hours billed, etc.) that you will sell during the next three months?
4. In the next three months, do you plan to increase or decrease the total number of people working for you?
5. Do you expect to find it easier or harder to obtain your required financing during the next three months?
6. Looking ahead, do you expect to make any capital expenditures in the next three to six months?
The inability to give a directional answer to these questions is a manifestation of uncertainty. The maximum value with six questions for the Uncertainty Index is 120 (everyone saying “don’t know” etc.). The level of Uncertainty has been historically high since 2016 with the exception of a few years after the Covid shutdown when consumers were more confident about growth and policy. The 2024 election brought back a wave of uncertainty.
Business owners must plan and strategize to secure successful growth. Plans are always about the future, future actions to be taken to strengthen sales and the firm. This is hard to do when so much is changing. Owners need more certainty and confidence to meet the future. It will be helpful if the administration moves quickly to implement its policies.
Read the full article here
