Small business owners across Michigan feel a little less optimistic about the short-term future, as inflation, economic uncertainty, staffing shortages and the resulting higher labor costs take a toll on their confidence.
Nearly half of the small business owners answering a Small Business Association of Michigan quarterly survey said they were “somewhat” or “very optimistic” about their prospects in the coming six months. That’s down seven percentage points from a year ago.
The results from the latest SBAM member survey showed a continued “moderate, but steady decline in confidence” over two years coming out of the pandemic and related restrictions, President and CEO Brian Calley told Crain’s Grand Rapids Business. The economy, inflation, and labor shortages were cited as the biggest challenges that small business owners face.
“If you look back a couple of years, you see the economic concerns and rising inflation, and the interest rates that come along with that, that coincides with this erosion of confidence,” he said.
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While the high U.S. inflation has moderated and come down over the last several months from 40-year highs, “most businesses are still struggling to cope with the added costs of the previous inflation,” Calley said.
“It’s not like lower inflation means costs come down. A lot of that was tied to the cost of labor. Those costs don’t come down, they only go up,” he said. “So, it’s a matter of still toiling through the compressed margins and the changes that have happened over the last few years.”
In the latest inflation report, the U.S. Bureau of Labor Statistics said Tuesday that the Consumer Price Index increased to a seasonally adjusted 0.3% from December to January, the highest rate since September. The core CPI, which excludes volatile food and energy prices, increased 0.4% in January, the largest increase since April.
Overall, inflation was 3.1% in January, versus 3.4% in December. While the present inflation rate is much lower than the peak 6.6% recorded in September 2022, it remains well above pre-pandemic levels.
The higher rate for January is “another reason” why PNC Bank economists doubt the Federal Open Market Committee will begin to lower interest rates at its next meeting in March and instead may wait until midyear.
“The committee wants to see more progress on inflation before it feels comfortable cutting its policy rate. The January reacceleration is likely an aberration; inflationary pressures in the U.S. economy are gradually easing,” PNC economists wrote in an economic briefing following the CPI report. “In particular, more slack in the labor market and slower rent growth will contribute to a slowing in services inflation this year.”
PNC projects that the FOMC will start to reduce interest rates in May with a quarter-point cut in the benchmark federal funds rate, followed by three more quarter-point reductions through 2023.
“These expected rate cuts will support economic growth in 2024 and 2025. With inflation slowing and the labor market strong in early 2024, PNC is moving to a forecast for slower economic growth this year, a change from its previous baseline forecast for a near-term mild recession,” economists wrote in the briefing.
Despite outlooks that generally expect slow economic growth but no recession this year for the U.S., results from the SBAM survey show many small business owners are preparing for an economic downturn.
More than six out of 10 respondents said they are preparing for a recession by delaying capital expenditures, implementing hiring freezes and reducing overall expenditures, even as results indicate a sense of overall long-term optimism for their company’s prospects.
“People are going through every line item right now and figuring out what’s essential and what is not essential, because there’s just uncertainty out there,” Calley said.
That uncertainty stems from challenges such as inflation and regulations, including new federal rules that take effect March 11 that will limit the use of independent contractors. More than half of the small business owners answering the latest survey report that the new U.S. Department of Labor rules on independent contractors “will have a substantial or moderate impact on their business,” according to SBAM.
“The world for some businesses who use independent contractors or are independent contractors will change pretty dramatically on March 11,” Calley said. “Those types of situations create a scenario where I think there’s some level of pessimism sets in where, ‘I’d better hunker down here.’ Then you put on that all of the uncertainty in the world, that stuff piles on.”
In other survey results, pessimism among SBAM members about the next six months increased from 20% a year ago to 28%.
Nearly two-thirds said they were optimistic about their company’s long-term survival, which suggests that “entrepreneurs expect conditions to improve beyond six months,” according to SBAM.
The survey also found that more than one in four SBAM members now use artificial intelligence in marketing, data analytics, as virtual assistants, and in business operations.
About one-third said they would benefit from the restoration of a research and development tax credit that state legislators are considering.
Many people perceive R&D “as something that just big institutions do,” Calley said, but a lot occurs at small businesses that are developing new products and services, such as software firms or even craft brewers or wineries.
“R&D happens in every industry,” he said.
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