As is often stated, small business in America is a large job creator on a year-to-year basis historically. Prior to the pandemic, small business creation was strong and helped usher in an environment where the domestic unemployment rate in January and February 2020 fell to 3.5%, a 50-year low. Small business creation, as measured by the number of business applications compiled by the U.S. Census Bureau, was steady or modestly increased in the few years prior to the pandemic.
But after an initial dip in the early months of the pandemic in 2020, applications surged as many unemployed workers attempted to become business entrepreneurs in an effort to buffer a loss of or meaningful reduction in income. This was in response to government attempts to stem the spread of COVID-19. Many small businesses, especially those in service-oriented industries, found their operations shuttered and their customers hunkered down at home trying to stay healthy. Over the past year, business applications have waned as the economy opened up and more jobs became available.
Chart 2. NFIB Small Business Optimism Index
Sources: Bloomberg and Wells Fargo Investment Institute, as of May 12, 2022
Over the past year or more, as the intensity of the pandemic has meaningfully eased, many small businesses have seen a large percentage of their customers return, but all has not been smooth sailing. In fact, the NFIB’s (National Federation of Independent Business’s) monthly Small Business Optimism Index notched its fourth consecutive reading (93.2) below the 48-year average (98) and the lowest since the depths of the pandemic-induced recession in April 2020. So why are small business owners participating in the NFIB survey so gloomy?
The latest survey also revealed other angles on the small-business pessimism:
Inflation and related supply disruptions: The survey revealed that the highest percentage of small business owners were most concerned about the effects of inflation on their operations since the fourth quarter of 1980. Supply chain disruptions were noted by 70% of respondents as having a significant or moderate impact on their operations.
Difficulty in hiring qualified workers: In addition, small businesses are having a tough time finding workers. Both skilled and unskilled workers remain in short supply.
Limited opportunities to improve productivity: Capital spending by small businesses looking ahead will likely be focused on replacing equipment only when necessary and investing to improve automation and productivity given the tight labor supply and high costs of worker retention.
Another angle on the small business story is related to government policy, especially taxation and regulation. The NFIB has issued comments in recent months on the potential negative effects of some administration proposals in its 2023 budget surrounding the treatment of small businesses.6 In particular, NFIB members are concerned about a potential increase in the corporate tax rate to the 28% level without lower rates for smaller businesses, increases in capital gains tax rates, eliminating stepped-up basis, and taxing unrealized gains above $100 million.
The Biden administration, on the other hand, has been highlighting efforts it is making to help small businesses and increase small business creation. The administration has put forth a four-pillar strategy to support small businesses.7 Those pillars are: 1. Expanding access to capital by offering more than $300 billion in loans and equity investments through the end of the decade; 2. Making historic investments in programs that help entrepreneurs find the resources they need; 3. Leveraging federal procurement, infrastructure spending, and research and development to direct hundreds of billions in government contracts to small businesses; and 4. Leveling the playing field for small business owners by reforming the tax code.
Essentially, the Biden administration is pointing to micro policies to lower barriers to small business entry and to improve access to credit. These are always top of mind in small business surveys. However, policy evaluation and political support for an administration typically are skewed more toward the macro issues, like tax changes, inflation, and the policy impact on borrowing costs. It is no surprise to us, then, that the tone of the NFIB assessment of the administration’s policies is largely negative.
In closing, recent U.S. small business optimism readings are well below average, largely based on the negative effects of inflation, supply chain disruptions, and a shortage of skilled and unskilled labor. The White House is making efforts to help small businesses, but business owners are also concerned about the ramifications of potentially higher corporate taxes and regulatory changes, now or in the future.