The New Administration and Its Impact on Business and the Economy
The new administration in Washington, D.C., has hit the ground running, leaving many scrambling to keep up with the rapid pace of policy changes and shifts in direction.President Biden has been actively reviewing and redirecting federal spending, uncovering and addressing what appears to be misdirected allocations. This newfound focus on fiscal accountability has put business owners across the country on edge, as they await clarity on how these changes will affect the economy and their operations. The uncertainty surrounding these policy adjustments has sparked widespread concern about the potential impact on small businesses, which are often the backbone of local economies.
Small Business Owners Face Three Major Challenges: Labor, Inflation, and Taxes
For small business owners, the top concerns remain labor quality, inflation, and taxes. In recent surveys, 19% of small business owners identified labor quality as their most significant issue, while 16% highlighted inflation, and another 16% pointed to taxes as their primary concern. One key issue on the horizon is the scheduled expiration of the Tax Cuts and Jobs Act (TCJA) provisions in 2025. If these provisions are not extended, small businesses could face a significant tax increase, adding to their financial burden. The concerns about inflation are particularly pressing, as the cumulative price level increases since 2021 have not subsided, leaving prices elevated. This has created a challenging environment for businesses trying to manage their costs and maintain profitability.
The labor market has also proven to be a significant hurdle. In February, 89% of small business owners who were hiring or attempting to hire reported difficulty finding qualified applicants for open positions. Nearly one in five small businesses cited labor quality as their biggest operational challenge. This labor shortage is not only affecting productivity but also limiting the ability of businesses to grow and expand.
Consumer Sentiment and the Role of Politics
Consumer sentiment has also taken a hit in recent months, as uncertainty about the future has dampened spirits. The University of Michigan’s Index of Consumer Sentiment declined from 70.5 in October of last year to 64.7 in February. This decline was particularly pronounced among young people aged 18 to 35, whose sentiment dropped from 75.5 to 71.2 during the same period. Politics appears to play a significant role in these shifts, with Democrats experiencing a 40-point drop in their Index scores between October and January, while Republicans saw a 33-point increase. These shifts highlight the deepening political divide and its impact on economic confidence.
Business Investment and the Role of Uncertainty
Most businesses aim to grow, and to achieve their growth goals, they invest in plants, equipment, and training. However, this willingness to invest is contingent on the confidence that these investments will yield positive results, such as increased sales and profits. Business owners need to have a clear forecast of future conditions to make informed decisions about spending and hiring. Uncertainty, defined as the inability to provide a directional forecast (e.g., higher/lower, faster/slower), undermines this confidence. When business owners are uncertain, they are less likely to make the investments necessary to drive growth.
The National Federation of Independent Business (NFIB) Uncertainty Index
The National Federation of Independent Business (NFIB) has been tracking small business sentiment since 1973, with monthly surveys since 1986. The NFIB Uncertainty Index measures the percentage of small business owners who respond with “I don’t know” or “uncertain” to six key questions about their expectations for the next three to six months. These questions cover topics such as the likelihood of expansion, general business conditions, sales volume, hiring plans, access to financing, and capital expenditures. The index reaches a maximum value of 120 (if all respondents express uncertainty). Since 2016, the level of uncertainty has been historically high, with a brief decline during the COVID-19 pandemic when consumer confidence in growth and policy temporarily improved. The 2024 election has brought a new wave of uncertainty, as business owners grapple with the implications of political changes.
Moving Forward: The Need for Clarity and Certainty
Business owners must plan and strategize to secure successful growth, but this is increasingly challenging in an environment marked by rapid change and uncertainty. The inability to predict future conditions with confidence makes it difficult to develop effective strategies for sales growth and operational strength. To address this, the administration would do well to move quickly to implement its policies and provide clarity on future directions. This would help reduce uncertainty and restore confidence among business owners, enabling them to make informed decisions about investments, hiring, and expansion.
