Dog Days Continue

The economy continues to languish while the politicians blame each other and business owners continue to wait for signs that things are really going to improve.

The big word for many entrepreneurs is uncertainty. It is not only uncertainty about when a true recovery will begin, but also uncertainty about things such as tax rates, regulation, and global economic instability.

While the Intuit Small Business Index shows continued weak improvement, other surveys show business owners to be more cautious.

The latest report from the NFIB is more of the same.

“July looked a lot like June in terms of job growth—namely, it was negative”. said chief economist for the NFIB William C. Dunkelberg. “On balance, July looks like a repeat of June, few jobs and no change in the unemployment rate. So far, it has turned out to be a cruel summer of dashed hopes for meaningful job creation.”

SurePayroll’s Small Business Scorecard shows that month-over-month, hiring remains flat and the average paycheck is down.

“Small business owners are optimistic by nature and they know that if you have a good idea you can take advantage of the lower costs in this economy and be successful,” said SurePayroll CEO and President Michael Alter. “Still, we need more incentives for investors to back startups and less tax burdens on small businesses.”

High Tax Rates Stifle Entrepreneurship

New research released today by the NFIB suggests that allowing tax relief on the top individual rates to expire will hurt job creation and the economy.

The report, published by Ernst & Young and authored by Dr. Robert Carroll and Gerald Prante, estimated the effects of the policy advocated by President Obama and some Members of Congress to allow the top tax rates paid by small-business owners to rise sharply starting January 1, 2013. It finds that over time the economy would be 1.3 percent smaller and there would be 710,000 fewer jobs. More than 72 percent of S corporation income is earned by the half-million S corporation owners who pay the top two rates.

Increasing individual rates directly impacts small businesses organized as S corporations, partnerships, LLCs and sole proprietors, also known as “pass-through” businesses. NFIB research shows around 75 percent of all small businesses are organized in such a manner.

Together with the new 3.8 percent tax on investment income introduced in the health care reform law, the study finds that the top tax rate on pass-through business income would skyrocket from 35 to nearly 45 percent.

Other studies suggest that such a 10% marginal tax rate increase will decrease start-up activity by 15-20%.

Why the Mood of Entrepreneurs Matters

The word out today on the mood of entrepreneurs in the U.S. and it is not at all encouraging. The NFIB Small Business Optimism Index is down sharply this month.

And who can blame them!

Unemployment remains high and shows to positive growth. Don’t be fooled by the “80,000 new jobs” spin. Due to our population growth in this country we need at least 130,000 new jobs each month just to break even with the added people coming into the workforce. Without jobs, people are not spending. And without spending in our economy, there is no reason for entrepreneurs to become aggressive again and get into a growth mode.

The President is drawing a line in the sand insisting on increasing taxes for those earning over $250,000 a year. Many who fall into this proposed tax increase are entrepreneurs. We know that for every 1% increase in the marginal tax rate that we can expect a 1.5 to 2.0% decrease in start-up activity. Remember that this announcement came after the survey from the NFIB that showed a sour mood among business owners.

And then there is the new healthcare model about to roll forward in this country. Many small business owners are paralyzed by the implications of this law. I have had a couple of friends estimate the costs for their small businesses and it is tens of thousands of dollars for even a modest sized payroll. Obamacare will lead to a huge decrease in employment in small business as it is implemented over the next two years. (By the way, most of what we are hearing from the Republicans is only lip service, so we should all plan for it to move ahead).

So we can see why small business owners are in a foul mood. A weak consumer base, increasing taxes, and increasing labor costs are not going to spur entrepreneurs to help lead the economic recovery.

So why should we care?

Entrepreneurs have led every past recovery. If they are not optimistic they are not going to hire more workers, buy more inventory and increase capital spending.

This economy is dead in the water and we are doing everything wrong when it comes to helping those who can help rebuild economic growth

A Tough Road During Tough Times

Several new studies of small business owners today show that tough times continue for entrepreneurs.

Two surveys released today offer some disturbing results. Wave Accounting, a cloud based accounting software company for micro and SMB’s, released a survey of their 250,000 micro and SMB customers and Pepperdine University’s Graziadio School of Business and Management joined with Dun & Bradstreet Credibility in a survey released today of 6,000 small business owners.

The Wave survey reinforced what a lot of us suspected. The number of accidental entrepreneurs, those who started businesses after finding themselves unemployed and unable to find work, has doubled over the rate found before the recession began (from 9% to 18%).

And the role that government incentives played in their decision to launch their business? Only 2% of respondents in the Wave survey said government incentives fed the decision to go into business for themselves. And in the Pepperdine survey, only 1% said the highly publicized crowdfunding JOBS Act would have any impact on their ability to raise needed funding. So don’t let politicians fool you into believing that their attempts to steer and guide the economy have an impact!

And speaking of financing, only 41% of the businesses looking to raise capital were successful.

A shocking figure from the Wave survey relates to how well the business owners were able to meet their basic needs through their business. An incredible 52% of American small business owners can’t put food on the table through the earnings from their business over the past twelve months.

Even though many said they can’t make ends, it is not due to a lack of effort. Two thirds (66%) of business owners in the Wave survey reported struggling with time management and work/life balance with 43% of respondents having to work after normal business hours to take care of administrative tasks like accounting and bookkeeping.

All of these results shed light on why business owners remain gloomy about the outlooks of the economy. Last week the NFIB small business optimism survey continued to show weak results.

“In the last year, small-business optimism has limped along, and today the sector is no better off than it was just over a year ago,” said NFIB Chief Economist William Dunkelberg. “The lack of progress is discouraging, producing no signs that economic activity will pick up this year at all. The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health-care costs, regulatory compliance costs, all of which are very uncertain. Most of this uncertainty is the result of what is happening—and not happening—in Washington.”

A survey released earlier this month by Citibank suggests that entrepreneurs are not giving up in spite of all of the challenges they now face. 53% of respondents of this survey say they have reinvented their business models “to stay afloat or competitive.” This strategy is reinforced in the current competitive climate that 38% of respondents describe as “extremely intense.”

As I have pointed out in the past, we need to keep in mind that all of these results come from surveys of business owners who have survived the recession. Imagine what all of those who are casualties of the Great Recession might tell us!

Small Businesses Still not Hiring

It is getting to be a broken record — we need small businesses to lead us into a real recovery that is based on job growth, but small businesses are just not ready to increase their workforces.

Two job indexes released this week show mixed results.

SurePayroll Scorecard data shows that month-over-month, hiring is down -0.1% and average paychecks are down 0.3%. Looking at this year compared to 2011 at the same time, hiring is down 1.3% and paychecks are down 1.3%.

The same survey showed a drop in optimism among small business owners to 65%, down from last month’s 70% finding.

Like the recent NFIB surveys, those small businesses looking to hire are finding it a challenge, particularly when it comes to finding qualified technology, sales/marketing, customer service, administrative workers.

The Intuit Small Business Employment Index shows that small business employment increased slightly — 0.2 in April.

Taken together it paints a familiar picture — no recovery led by small businesses is visible at this time.

All Signs Show Continued Weakness in Job Creation

It looks like a continuation of a weak economy is likely for at least the rest of 2012. We know from previous surveys that weak demand is what is holding businesses back from hiring. It appears that a turnaround is not in our immediate future.

There were some signs of hope in March’s employment numbers. Intuit Small Business Employment Index showed modest growth in jobs. And the latest survey from the NFIB also showed some improvement in March. One exception to these surveys was SurePayroll’s Small Business Scorecard, which showed no job growth in March.

While there has been evidence of modest improvement in job creation over the past few months, the outlook is not good for any continuation of job growth in the economy. It appears that any improvement may have been short-lived and not sustainable.

“March came in like a lion, with Main Street seeing significant job growth in March—but it appears to have gone out like a lamb, and with no cheer in the forward-looking labor market indicators. What could have been a trend in job growth is more likely a blip,” said NFIB Chief Economist Bill Dunkelberg. “And what looked like the start of a recovery in profits fizzled out. The mood of owners is subdued—they just can’t seem to shake off the uncertainties out there, and confidence that the management team in Washington can deal with the effectively is flagging. What we saw in March is painfully familiar – this was the same pattern of growth followed by months of decline from 2011. History appears to be repeating itself—and not in a good way.”

An additional concern in the NFIB survey is that those small business owners who do want to hire, are having difficulty in finding qualified workers. Among the entrepreneurs we work with, the specific shortage is in technology workers.

So what do we hear from policy makers in Washington? They continue to treat the current situation as if it is simply a shortage of capital. The latest attempt to pump money into the system comes from the “Jobs Act.” This legislation is an attempt to open up capital markets to support entrepreneurial ventures to a broader group of investors. (NOTE: The devil is in the details regarding any impact on this new law as the SEC has yet to write the rules. Stay tuned, as the actually implementation of this bill will likely be very different than advertised by the politicians who passed it).

But even if the Jobs Act was implement as promised, it does not solve the real problem in our economy. As Ami Kassar rightly points out, this bill plays into the myth of what kind of entrepreneurial activity really grows an economy. This is a bill that plays well in Silicon Valley, but probably will have little or no impact on Main Street. Kassar argues:

In my opinion, the last thing these main street entrepreneurs need is crowdfunding (passed in the Jobs Act today). The first thing an entrepreneur should do is try to figure out how to execute their business model without selling off shares to investors. After all, the investors never go away in their company.

We should be encouraging our entrepreneurs to bootstrap their ventures. We should be doing everything in our power to open up lines of credit and loans at reasonable prices to small business owners. We should be doubling down on efforts like SCORE and / or the SBDC’s to provide mentorship.

And we need to leave more money in the pockets of the consumers who do have jobs and in the bank accounts of the small business owners struggling to sustain their businesses through this prolonged recession. Government is never an efficient nor an effective middle man for economic growth. Let’s keep more of the money people are earning in their wallets so they can begin to spend more of it on Main Street.

There’s a Storm Brewin’

Recession clouds appeared in the skies over Main Street, according
to the most recent National Federation of Independent Business Small
Business Economic Trends member survey. The NFIB Index of Small
Business Optimism fell 3.3 points in March to 89.6 — its lowest
reading since the monthly surveys were started in 1986, and the lowest
quarterly reading since the second quarter of 1980. The decline was
driven by a sour outlook for business conditions and real sales growth,
accounting for half the decline in the Index. Weaker plans to create
new jobs accounted for 21 percent of the decline.

“We are seeing recession readings,” said NFIB Chief Economist William Dunkelberg.

What is worse is that the labor market is still somewhat tight and price pressures continue to push costs up.

More signs that stagflation might be on the horizon.

Dr Jeff Cornwall

Tag Archives: NFIB