The Economy

Small Biz Whipsawed by Uncertainty

Is the post-election persistence of economic uncertainty creating a feedback loop that's making small business investment-phobic?
David RosenbaumNovember 21, 2012

The National Federation of Independent Business’s November Optimism Survey (conducted before the presidential election) reported that small business enthusiasm for the economy rose a tick in October, signifying (according to the NFIB) not very much. That’s because 23% of the over 2,000 small business owners it polled were “uncertain about whether business conditions would be better or worse in six months.”

According to a statement by NFIB chief economist William Dunkelberg, even after the election that uncertainty would “seriously impede [future] spending and hiring.”

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One would have thought that the election would have resolved a great deal of that uncertainty, and relieving uncertainty would have put a dent in the pessimism the NFIB reports. But that seems not to be entirely the case.

The Manta SMB Wellness Index survey released last month, again before the election, reported that 67% of the 1,854 small business owners who are members of Manta’s network were optimistic about the nation’s post-election economic outlook. However, a third of Manta’s members are still not optimistic. And a third said their business had experienced losses this year. Another 80% did not add any employees last quarter.

For its part, the NFIB has been singing and broadcasting a pessimistic tune for a long time. A July NFIB-sponsored study, conducted by Ernst and Young, argued that the increased marginal tax rate proposed by President Obama that would affect the 2% of individuals earning over $250,000 (and consequently many small businesses that pay the individual tax rate) would “result in a smaller economy, fewer jobs, less investment, and lower wages.”

And if that weren’t bad enough, higher tax rates would “have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages.”

And that’s all before we get to the hot topic of the day, the so-called fiscal cliff that is causing half of the nation’s 40 biggest public corporations to announce that they’re holding back on capital expenditures this year, and may do the same next year.

Small business is also affected by the fiscal cliff, according to an opinion poll released last week by the Small Business Majority. The SBM poll says nearly eight in 10 small business owners are “concerned,” with over 50% “very worried,” about the cliff generating a possible 2% increase to the employee portion of payroll taxes (which they believe will drive down consumer demand). But unlike the NFIB’s study, the SBM says the majority of small business owners agree that “raising taxes on the wealthiest 2% is the right thing to do.”

Who and what is a small business owner to believe?

Yet another survey, this one conducted by TD Bank, which the Small Business Administration lists as the country’s seventh largest provider of SBA 7(a) small business loans, polled over 400 small business owners. Over half said that the stress of running their businesses was increasing.

However, Jay DesMarteau, TD Bank’s Head of Small Business and Government Banking, believes that the stress level is coming down now that the uncertainty of who will be president, and what economic policies the new president will pursue, has been resolved. “Small business owners are now thinking about how they’ll deal with health-care reform and tax increases, not if they’ll have to deal with them,” says DesMarteau.

With increased certainty, he says, “You can react to an environment you know and make adjustments. Small business is good at that. You can plan for your 2013 revenues and get your finances in line with that.”

However, DesMarteau admits that even though credit “has been and is available,” businesses are still reluctant to borrow. “I see deposit balances going up,” he says. “People are sitting on cash.”

When asked why, DesMarteau cites continuing uncertainty.

There’s little uncertainty about the fact that uncertainty itself, and the negative emotions uncertainty generates, can affect the way a business acts. A 2005 article published in the Journal of Behavioral Finance concludes that “the tone and character of business activity follows, rather than leads, social mood.”

Today, that social mood, generated, in part, by surveys, opinion polls, and news reports is predominantly pessimistic. And, unfortunately, pessimism is stronger than optimism. According to a 2004 study in Business Horizons, “The chances are higher that a pessimist will convert an optimist than the other way around.”

In other words, the more one believes that things are going to hell in a hand basket, the more you will act as if they are, and the more you act that way, the more people will follow you. The optimist, it seems, drinks his half-full glass alone.

But DesMarteau is basically optimistic about small-business resilience and the fundamental practicality of small business owners. “Small business owners are close to their revenue lines,” he says. “They tend to understand how they deliver their product or service to their customer base. They get feedback more directly than larger businesses. I see people pretty focused on how to deliver at a cost that makes sense relative to the costs they’re facing.”

Adds DesMarteau:“Reality has set in.”

And as entrepreneurs and small-business people know, reality is what you make of it, no matter what anyone else says.