What’s Holding Down Small Business?

Talk shows have no shortage of folks pointing the finger. You’ve heard them. They say it’s government regulation. Taxes. Obama. Banks won’t lend.

Few of the pundits are small business owners. But the National Federation of Independent Business (NFIB) – the national, non-profit organization representing small and independent U.S. business – polls small business owners each week. One question in each survey asks, “What’s the biggest problem you face today?”

The biggest problem reported today by actual business owners? Demand.

Historical survey results are presented in the chart below. Since the survey began in 1986, “Taxes” has consistently held the top spot, surpassed just a few times by “Regulation” briefly in the mid 1990s and “Insurance” in the early 2000s. At the onset of the 2008 recession, however, “Sales” surged to number one for the very first time. It’s remained that way ever since.

Interestingly, “Interest Rates & Finance,” which we can safely assume includes access to debt and equity capital, has never been reported to be a problem. It seems the NFIB poll results debunk the common claim that “it’s a lack of capital.”

Why has “Demand” risen to the top and surpassed “Taxes”?

Sales suffer during slow economic times. When sales suffer, companies have a hard time booking a profit. When profits aren’t being earned, all other problems are trumped. Taxes are only a problem when there’s profit.

As one can see in the graph, the incidence of “Sales” being reported as the number one problem rises during each recession. See the rise of the “Sales” line in 1991/1992, 2001/2002, and 2008 through the present? Note that the official end of the most recent recession was in July 2009, but “Sales” remains the business owner’s biggest concern. Judging from the results displayed in the chart, the recession is not over for owners of small U.S. companies.

What can we do to spur demand?

Good question. Higher demand comes, of course, from higher spending. Unfortunately, we appear to have reached the end of the forty-year debt binge that occurred at all levels – government, business, and individual. The borrowing funded spending that could only be sustained with continued borrowing. Borrowing capacity is limited, however, and many have, or are now, suffering from excess debt (“leverage”). We’re in the hangover that follows the binge. How do we recover? Abstinence. Unfortunately, abstinence from debt and deficit spending is the opposite of what we need. It’s the problem.

Governments, companies, and individuals have moved, by necessity as well as by cultural shift, to debt reduction. Instead of borrowing money to spend more, each group is cutting spending and paying down debt. The result is reduced demand (buying) throughout our economy.

In addition, economic uncertainty is prevalent. People and companies save more and spend less in the face of uncertainty. So, the results of the NFIB survey are not surprising. And there’s no single person (or organization or group) to blame nor is there any easy fix.

Of course, so long as the U.S. government is willing and able to borrow and run deficits, it can prop up demand during weak economic times. How? By pumping up government spending. This is what it’s done in the past (at least since it learned a lesson during The Great Depression). The result has been shorter and shallower recessions.

In the current recession/economic slowdown, our government has again pulled this important anti-recession lever – that’s one big reason we’re running huge deficits – but it hasn’t worked. The demand gap is apparently too large. Also, our federal government is showing signs that it has reached its debt load limit. As such, going forward, our government will have limited ability to generate demand through spending, at least until it adds borrowing capacity by either paying down debt (“deleveraging”) or by increasing revenue (raising taxes or expanding the economy), or both.

This is the peril of our failure to pay off debt during the good times. Our only choice now may be to wait it out.  Over time, debt loads will be paid down, optimism will return, and spending will naturally recover.

How long might this take? Nobody knows. That’s why everyone remains cautious.