Small Business Owners Still Concerned About the Future

The National Federation of Independent Business (NFIB) issued yesterday their monthly report based on a survey among small business owners. The chart from this report illustrates the roller coaster of emotions among business owners these past three years. Small businesses, defined as having 1 to 500 employees, were hit very hard in 2020 by the government policies during the pandemic forcing temporary closures followed by near-impossible terms to conduct a business. Although sentiment among small business owners plummeted in early 2020, the bounce back was surprisingly strong, apparently on the hope the 2019 economic momentum would return quickly.

During a normal day, we all interact with small business owners and their staff. Whether it's the local restaurant, hair salon, small engine repair, or financial advisor, we are all connected. During 2020 we featured in our Weekly Briefs interviews with several local small business owners and how they were adapting to the many changes taking place in the US and abroad. Most of those we interviewed survived the US draconian regulations, but many throughout the country were not so lucky and were forced to close. The NFIB optimism levels peaked in mid-2020 and then dropped as it became clear neither the viral infections nor government regulations were lessening anytime soon.

As government agencies began relaxing restrictive policies in 2021, optimism among business owners improved. As fears abated for a worst-case scenario relentlessly promoted by health officials regarding massive viral-related death rates as high as 6% of the world population, business owners rebounded with optimism in 2021. It appears business owners still believed the fundamentals and momentum of the pre-pandemic strong economy would return, allowing their businesses to recover.

But the greatest challenge to business owners this decade has yet to be unleashed.

Beginning in March 2022, Jerome Powell and the Federal Open Market Committee (FOMC) implemented the committee's most aggressive rate hike campaign since former chairman Paul Folcker and his FOMC did the same in 1979. The result of 13 consecutive rate hikes caused credit markets to tighten up their lending policies, increased borrowing costs, and limited business owners' options to refinance or apply for new loans. The former days of borrowing funds at 2% to 5% to finance growth were over, and many suffered financial challenges with too much short-term debt and didn't have the means to pay off their balances. NFIB sentiment index dropped significantly in 2022 and below levels reached in 2020 which ironically indicated business owners' fear of rising interest rates was greater than the worst worldwide viral infestation since 1917.

However, looking at the NFIB chart for just the past three years doesn't reflect a once-in-a-lifetime experience. Below is the NFIB chart for the past 25 years. A similar pattern of dramatic changes in small business sentiment leading up to and through the 2008 Great Recession. Even with the tech bubble recession of 2000 – 2003, NFIB sentiment levels were relatively stable and consistently above 95, an indication of favorable views. With the recovery of the technology sector and stable US economic growth, NFIB sentiment levels reached all-time highs by late 2004. However, business activities began to slow in 2005, even with the boom of the real estate industry, stable inflation, and interest rates below 30-year averages. NFIB sentiment had started to decline from its 2004 peak and by 2007 was in a steady decline that plummeted in 2008 to record lows and well below even 2020 levels.

However, once the economic storm passed in 2009, business owners' sentiment improved and ultimately rose to new all-time levels in 2017-2019, setting up for the next economic roll coaster.

WHAT DOES IT MEAN TO ME?

Small businesses hire 99% of all employees in the US, providing the financial foundation for stability for households and economic growth. Monitoring the financial behavior and sentiment of small businesses is as important as monitoring consumers and households. A good indicator of continued US economic growth is when small businesses are hiring and growing. Good economies are the basis for good stock market returns. If consumers and small business owners are optimistic about their economic future, then there is a high probability that stocks will rise with earnings.

We maintain our overall favorable outlook on the stock market based on yesterday's NFIB report indicating improving small business sentiment along with similar moderate and improving consumer sentiment. Consumers and small businesses are the dominant influencers in the US economy. You don't need to be a daily viewer of CNBC to determine the prospects of the stock market. Instead, go to any number of businesses, from Home Depot to local restaurants, and observe the buying behavior of customers. This is real-time economic data.

During the holiday season, I observed not only how many people were at the malls and retail stores but how many were carrying bags of purchased goods. I am always perplexed how a 2000-square-foot Apple store will sell hundreds of thousands of dollars of product a day that dwarfs by large margins the sales of big box stores such as Nordstroms and Macy's. You may be surprised to know that one of the most profitable sales per square foot retail stores is coffee shops. Not unusual for coffee shops to net $1000 per square foot per year. In other words, an 800-square-foot coffee shop can profit over $800,000 per year.

Let us know your thoughts on this Weekly Brief or our podcast on this topic. We welcome the opportunity to be of service to assist you and your family in building your wealth and achieving your financial plan goals.