Small businesses brace for reduced consumer demand

Small businesses are bracing for a year of labor shortages, inflation woes and reduced consumer demand even as they grow hopeful about recovery from the COVID-19 pandemic, studies show.

The National Federation of Independent Business reported Tuesday that its Small Business Optimism Index rose 0.5 points to 90.3 out of 100 last month. An increase in the share of owners expecting better business conditions in the next six months led the way.

January marked the 13th consecutive month that the index fell below the 49-year average of 98, the Nashville-based small-business association reported. Inflation remains the single most important problem for 26% of small companies, and 42% said they have raised prices to cope.

“I am hopeful that inflation is nearing its peak,” Rhonda Sideris, founder of Park City Lodging, a vacation rental company in Utah, told The Washington Times. “Consumer spending is still up, and I’m forever the optimist. That said, the cost of doing business continues to be a challenge, with wage wars and ongoing issues with the supply chain.”

Inflation eased for the seventh consecutive month in January. The annual rate of rising prices for goods and services slowed to 6.4%, the federal government reported Tuesday.

Nevertheless, inflation rose by 0.5% from December to January. Monthly consumer prices also ticked upward.

Many small companies are showing “secondhand pessimism” about 2023 even as they keep spending and investing, the U.S. Chamber of Commerce said.

The lobbying group said 64% of small companies said their business was “good” or “very good” at the end of last year. Just 27% of the same companies said the nation’s economy was in “good health,” and 54% called it “somewhat poor” or “very poor.”

“I think inflation is still creeping up,” said Said Eastman, CEO of JobsInTheUS.com, based in Westbrook, Maine. “I see tightness in the labor market, wage pressure driven by competition, and clients who are paying more for goods and services they need to deliver to their clients.”

Fluctuating labor and production costs also have made it more difficult for small companies to get loans or budget effectively.

“Finding the right funding to launch a small business continues to be a big barrier, which is why it’s so essential that they have access to capital and cash flow tools,” Brett Sussman, a vice president at American Express, said in an email.

“The challenges from six months or a year ago are completely different [from] the challenges today, and likely there will be a whole new set of challenges in a year,” said Ami Kassar, CEO of Pennsylvania-based MultiFunding, which finances debts for small companies.

Pressures facing small businesses this year include wage inflation and decreased consumer demand stemming from interest rate hikes. Others include threats of renewed supply chain disruptions as a result of Russia’s war in Ukraine, new COVID-19 variants and a potential government shutdown in the divided Congress.

“Consumers are still spending, but many have eaten into their savings and increased their credit card debt to do so,” said Ben Johnston, chief operating officer of Kapitus, which finances small- and medium-size businesses. “If consumer spending declines in 2023, we can expect small businesses to suffer.”

Mr. Johnston said increasing delinquency rates, higher borrowing costs and consumer withdrawals of savings for outside investment opportunities are forcing many banks to reduce lending to small businesses.

“This means higher cost of capital and fewer options for growing small businesses,” he said in an email.

Small businesses account for 99.9% of all businesses nationwide, according to a report from the Small Business Administration, an independent federal agency. They employ roughly 61.7 million people, 46.6% of the nation’s workforce.

In a Goldman Sachs survey released this month, 70% of small businesses gave the federal government a grade of C or below. They called on lawmakers to modernize the SBA in response to pandemic challenges.

“Unfortunately, the lack of clarity in state and federal law on what constitutes an employee versus what constitutes an independent contractor hurts my business,” said Ronnie Slone, president of The Slone Group, a New Orleans-based business consulting startup.

“While the C or lower grade from small businesses is damning, there are a lot of dogs that aren’t barking, namely, businesses that would exist were it not for regulatory red tape at all levels of government,” said Art Carden, a business professor at Samford University in Alabama.

The latest federal job numbers show that the unemployment rate ticked down in January to 3.4%, its lowest level since 1969.

Yet the nation remains 2.8 million workers short of its workforce in February 2020, the last month before COVID-19 restrictions shuttered nonessential businesses, according to Bureau of Labor Statistics data.

Small businesses say they have struggled the most to fill job openings.

“At this time, the primary challenges that we face as a small business involve staffing and inflation,” Khari Parker, a co-founder of the Baltimore-based Connie’s Chicken and Waffles, said in an email. “Specifically, even though we offer competitive wages as it relates to our industry, we are unable to match the wages that larger businesses are able to pay for comparable talent within our local job markets.”

Mr. Parker said it costs his Black-owned restaurant franchise $138 to buy a case of eggs and $156 to purchase a box of chicken — up from $74 and $54, respectively, since the pandemic started. His four locations have raised prices by 15% to 20% to cope.

Rising costs also will make it harder to start a small business this year.

According to the U.S. Census Bureau’s Business Formation Statistics, 2022 startup applications for small businesses fell from 2021. Some economists say that trend could worsen this year.

“Even the high-propensity startups, which were supposed to lead the way with potential hires, have stumbled,” said Michael Austin, a former chief economic adviser to two Kansas governors and an economist at the National Center for Public Policy Research’s Project 21.