Small businesses say economic uncertainty is growing

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The mixed messages about the economy are making it difficult for business owners to figure out how to proceed. “It’s a big question mark.”

Jonathan Echeverry, owner of Paper Plane Coffee Co., stands in the space that will be used to expand his coffee shop next door in Montclair, NJ, on July 28.
Jonathan Echeverry, owner of Paper Plane Coffee Co., stands in the space that will be used to expand his coffee shop next door in Montclair, NJ, on July 28. (Evelyn Freja/For The Washington Post)
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Construction crews in Montclair, NJ, are working overtime on a $150,000 expansion of Paper Plane Coffee Co. that will double the size of the store to accommodate growing demand and create a new tasting room and space ​for events.

But if the economy turns sour, owner Jonathan Echeverry already has a plan B. He’ll stop hiring and trade up to cheaper varieties of coffee beans and local milk that’s a little less creamy.

“It’s a big question: we’re growing so fast that we need bigger machines and a bigger production facility, but what will things look like a year from now?” he said. “I’d be lying if I said I wasn’t worried about a recession.”

Two and a half years after the pandemic, small business owners say they are just beginning to recover from the shock that crippled many of them during early 2020 pandemic restrictions. Since then, owners have faced rising costs, labor shortages and huge swings in consumer demand often affected by the area’s coronavirus cases.

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Now they are being bombarded with various economic messages that have many people wondering what to do next. The US economy shrank for the second quarter in a row, reviving fears that the country could enter a recession. But an unusually strong jobs report last week erased many of those concerns, while also making it harder and more expensive for small business owners, particularly in the hospitality industry, to find and retain workers.

At the same time, consumer demand for goods has slowed and borrowing costs are rising as the Federal Reserve raises interest rates in hopes of slowing the economy enough to curb decades of high inflation.

“It’s been one hit after another for small businesses, and now we’re in this unusual situation where we just don’t know what’s going on with the economy,” said Paige Ouimet, a professor at the University of North Carolina’s Kenan-Flagler. Business School. “There’s a lot that’s up in the air, and uncertainty affects small businesses much more than larger ones.”

Small businesses – generally defined as those with fewer than 500 workers – are a critical part of the economy employing about half of the nation’s private sector workers. But they tend to have smaller financial cushions and fewer places to turn, especially compared to giants like Walmart, when times get tough.

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Running a business has always required a carefully calibrated balance of supply and demand forces, although Echeverry says he runs his own coffee company feels more and more insecure. The cost of coffee beans has doubled in the last year and consumable food items are increasingly out of stock. At the same time, regular customers have started to stop receiving weekly deliveries of premium coffee, saying it’s a luxury that no longer fits into their budgets. People who used to come four or five times a week for a latte now come half as often.

“There are a number of unusual currents in the economy right now,” said James Wilcox, a professor at the University of California at Berkeley’s Haas School of Business. “For small businesses, that means they will have fewer customers than they used to — which is ultimately the goal of the Federal Reserve,” in trying to curb rising inflation.

In interviews, more than a dozen small business owners described the steps they are taking to protect themselves from a potential economic downturn. Some say they are putting off routine renovations or bringing in contract workers instead of hiring full-time employees. Others are stockpiling goods at lower prices or canceling deals with retailers like Target and QVC to sell directly to consumers in a way that will give them more control over production and profits. All of these pullbacks, when multiplied over thousands of small businesses, can work to further calm the economy.

Many business owners say it’s been hard to predict when things might slow down, or by how much. Others are also still trying to make up for shortages in both workers and supplies and say they are hesitant to cut any more, even if it means eating into profits.

Higher Ground Transportation Services, a company in Bowie, Md., that provides buses and vans for groups and events, has a busy schedule this summer. But owner Jan Peters says she’s thinking twice before making long-term investments.

Peters is still struggling to build her business back to where it was before the pandemic, when she had to lay off five workers and sell five of her 13 vehicles. Since then it has hired four employees. But she’s also gradually changing her approach: Instead of more full-time workers, she’s bringing in part-time contractors — typically school bus drivers who are off in the summer and on weekends. And it has started looking for used rather than new vans to complement its fleet.

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“Even though this summer has been great for us, businesses like mine are still trying to get back to where we were before the pandemic,” she said. “Summer camps are saving us this year. We are doing weddings, proms, family reunions again. People love to travel locally, up and down the East Coast. But how long will this last? I honestly don’t know.”

Meanwhile, higher prices and supply chain hiccups continue to weigh on its business. Fuel costs are nearly double what they were a year ago, and Peters has had to raise wages by 20 percent to keep drivers from leaving for bigger, higher-paying outfits.

She’s also paying more for new vehicles, if she can find them at all. Production delays have made it nearly impossible to track down full-size vans — so much so that when she saw one with new tags recently, she followed it off the highway to see if she could pry the seller from had come (She couldn’t. “Other people are mesmerized by nice cars or jewelry, but I just notice new vehicles,” she said.)

But parts shortages have made it difficult to keep its existing vehicles on the road. One of her Mercedes Sprinter vans, for example, has been in the shop waiting for a new air conditioning fan for more than two weeks, she said, which amounts to about $10,000 in lost revenue.

After months of unsustainable rapid growth and rising prices, the Fed this spring began raising interest rates in hopes that higher borrowing costs would dampen consumer and business demand enough to cool the economy. Although there are already signs of a slowdown, especially in the housing market, economists fear that the full effects of higher interest rates could hurt the economy later in the year and trigger a recession.

“Businesses are slowing down, but what matters here is: To what extent?” said Betsey Stevenson, an economics professor at the University of Michigan. “We want businesses to get less credit, but how much less credit? That’s what the Fed is trying to get right by raising rates appropriately.”

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It’s a complicated calculation that is fueling business owners’ worries about the future. The percentage of small business owners citing an increasingly uncertain economic outlook rose sharply in July, while overall optimism remains near historic lows, according to data released this week by the National Federation of Independent Business.

At Flicks, an independent movie theater and restaurant in Boise, Idaho, business is slowly starting to bounce back after taking a nose dive during the pandemic. (The business lost $900,000 in the first year alone.) Now, new economic uncertainties have co-owner Carole Skinner putting the renovation plans on hold, which include a $100,000 investment in new locations, until she’s profitable again. She also wants to give longtime employees a raise, but says she’s waiting until she feels like the economy is on firmer ground.

During the pandemic, the theater installed a new air filtration system and tried a variety of marketing tactics: selling popcorn in theaters, for example, and offering DVD and VHS rentals near the curb. But even as pandemic concerns have eased, it has been difficult to win back customers who are used to streaming movies without leaving their homes.

“The last couple of years have been very bumpy,” Skinner said. “We tried everything we could to make some money, but it really wasn’t enough. We have hope, but we are still in the red.”

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The one bright spot, she and many others in the service industry say, is that consumers have shifted their spending from goods to experiences like dining out, entertainment and tourism. However, the immediate question is how long Americans will continue to spend.

Common Deer, a gift shop in Burlington, Vt., that specializes in American-made goods is being hit from both sides: by higher wholesale prices and shrinking budgets among its shoppers. As a result, co-founder Sarah Beal has started stocking products at lower prices, especially for the holidays.

“People who spent $50 on a gift for their granddaughter last year might have a budget of $30 this year, so we have to be ready for that,” she said. “We take a lot of gambles with retail — you’re buying inventory so far in advance and hiring people before you need them — that it becomes even more difficult when you’re not sure what’s going to happen.”



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