VOL. 127 | NO. 149 | Wednesday, August 1, 2012
The Worldly Investor
Small Businesses Create Big Economies
By David Waddell
While consumption expenditures account for 71 percent of our economy, investment activity (essentially delayed consumption) determines the magnitude of future consumption. When the economy generates a high level of investment activity, business productivity grows, innovations flourish and new employers create jobs. For these activities to occur, business owners must be willing to take risks. Within the U.S. economy, 65 percent of net new jobs created between 1992 and 2010 came from companies with fewer than 500 employees. In the U.S., as goes small business, so goes the economy.
Each month, the NFIB releases the results of its Small Business Optimism Index. Overall, small-business confidence remains surprisingly consistent. Dark periods like 1991 and 2002 produced low confidence readings, but confidence quickly rallied back into the normal range. Recall that in normal times, recessions reduce the cost of materials, employees and money. These discounts lead to investments as growth-minded small-business owners anticipate better and more profitable times ahead. This is the normal course of business.
Today, small-business confidence hovers near or below recessionary levels. While psychological progress has been made since the low tick in March 2009, confidence approximates late 2008 levels. Why so blue? The NFIB survey breaks the data down into 10 subcomponents and tracks the relative change of each. Without listing each item, the June report showed marked declines in economic, sales and earnings expectations. As mentioned, in typical recessionary environments, the lower costs of materials, people and money motivates optimistic entrepreneurs to invest, goosing the recovery engine. However, if the collective future looks bleak to small-business owners, lower input costs cannot motivate investment as they normally would.
When asked to identify today’s most important small-business problems, readings for labor costs, financing costs and inflation all register near historic lows. According to the survey, the No. 1 problem facing small businesses is poor sales (23 percent of respondents), No. 2 is taxes (21 percent) and No. 3 is government regulations and red tape (19 percent). Therefore, 40 percent of small-business owners cite government-related variables as their primary headwind.
In a recent Gallup poll, only 35 percent of small-business owners support President Obama. This contrasts with the 47 percent of the overall population supportive of the president. While the national presidential polls may be undecided, 65 percent of small-business owners hope for change.
By now, if you have followed my Boolean logic thread, it’s apparent that the key variable suppressing small-business expansion is uncertain future prospects created by government interference. With labor, finance and input costs low, businesses are primed for expansion. A meaningful uptick in confidence should produce a meaningful uptick in business investment and employment, which would in turn stimulate sales. For this reason, the 2012 presidential race has significant economic and investment implications. A Romney victory OR an Obama Clintonesque policy reversal should stimulate small-business optimism, which in turn should stimulate investment, innovation, hiring … and returns.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.