Mirador Capital Partners Wealth Management Blog

The Economic Impact of Small Business

Posted by Jonathan Ting on March 25, 2019

Small to medium sized businesses (SMBs) are the backbone of the US economy. That’s not just a line used by politicians to get reelected, it’s the truth.

Measuring Impact

In the US, between 40-50% of all employees currently work at an SMB. Approximately 30 million SMBs make up over 99% of total businesses in the US and contribute to about half of our total GDP. When evaluating the strength of the US economy you cannot overlook the impact that SMBs carry and it is something we follow closely.

On March 11, The National Federation of Independent Business (NFIB) released its February 2019 Small Business Survey report with SMB Optimism Index values.

SMB Optimism Index

SMB Optimism Index-1

SMB Change....Historically, the SMB Optimism Index has displayed a downward trend prior to recessionary periods of the last 30 years. Figures over the last few months have been startling, showing the index essentially entering a free fall, but it is important to also consider that they are coming off of a 30 year high in August 2018 and are still above the long-term average. The official press release this month was titled “Optimism Stabilizes Among Small Business Owners,” as the headline Optimism Index halted its previous five month consecutive downtrend, coming in at 101.7.

Historic SMB.

On the surface, most metrics have bounced back. Current job openings are at an all-time high (up 2 points from January), businesses are planning to increase capital expenditures (up 2 points) and expectations for the economy to improve have returned (up 5 points). Though promising, it is difficult to conclude whether this implies an actual “stabilization” of sentiment, as the NFIB claims, or a temporary blip in a clear downtrend. We’ve found that the underlying data, as opposed to aggregated number, paints a better picture of what might be going on. This month, the focus is on employment.

Jobs Are Being Created at a Record Pace and Companies are Feeling Pressure

Hiring

Recently, higher employment figures are prevalent in every economic report you pick up – over 300,000 nonfarm payroll jobs were created in January and unemployment is down to 3.8%, even with growing participation. The SMB data supports this thesis. Actual employment changes over the past three months have continued to climb upward, February’s reading was 9.0 making a three month consecutive uptick and reaching the highest level since 2005. Jobs are also plentiful, the current job openings reading continues to hover near the all-time high.

Job Openings

Job Applicants.

I think everyone can agree, more jobs are a good thing. When the labor market gets too tight though, issues can arise. As more people are employed, the talent pool shrinks and companies have a harder time finding unemployed job seekers. This usually leads to a gradual inflation in wages – companies are forced to compete over a smaller supply of job seekers and end up paying more to get them. From a macro perspective, this has the potential to introduce unsustainable pressure into the economy.

Wage Growth

As the cost to do business rises, earnings take a hit (and stock prices follow). Increasing wages can also lead to price inflation throughout the economy as people simply have more money to spend. If inflation rises above unsustainable levels, the Federal Reserve is forced to implement measures to actively slow the economy, The latest SMB report shows this pressure starting to build.

  • The talent pool is shrinking – SMBs are finding it difficult to hire qualified job applicants. The number of companies reporting this as an issue is at a 15-year high. This problem is also reflected in the number of job openings that SMBs are unable to fill, also near its all-time high.
  • Wage growth is an issue – Post-financial crisis through 2015, there was a slow increase in the percentage of SMBs reporting cost of labor as the biggest problem they faced. In 2016 to 2017 we see irregular upticks, but by 2018 the trend becomes clear. The latest reading shows that 10% of SMBs say wage growth is the biggest problem their business faces today. This is the highest reading in 30 years.

Coincidentally, SMBs have already begun pulling back on their future hiring plans.

Hiring Plans

At the moment, SMBs are facing considerable labor shortages and rising costs. Combined with data from other publications, it is clear that this problem is prevalent across the broader US economy. Over the next 3-6 months, wage growth and more importantly the rate of wage growth will be the key metric to track. If wages grow too fast while growth is expected to slow, it could come as a shock to equity markets. On the flip side, if the Federal Reserve is able to engineer a soft-landing using interest rates and their balance sheet, we might find a way to sustain the current levels. As of this moment, we lean towards the former.

Topics: Market Outlook

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