The business cycle may play an important role in how successful small businesses will be this year. Over the majority of the past year business confidence in the economy was at all-time highs and the machines were humming. The economy is a massive congruence of our nation’s businesses and consumers. It doesn’t shift overnight but tends to move modestly until the changing effects take hold. Let’s look at the main factors that will cause this shift in 2019.
Wages: Payroll will be at the crux of the problem for small businesses this year. The ideology that people can live on a minimum wage has proliferated for several years now, and is kicking in across many states. As the federal government does with social security, many states will also increase their minimum wage to meet the current inflationary levels. Other states will raise it in response to legislation created to establish a “living wage.” New York passed their own legislation to increase the minimum wage to $15 an hour in New York City by 2018, for example. Congress has also introduced legislation that aims to raise the minimum wage to $15, which will come into effect by July 2020.
Employment Cost Index for all employees in the United States from 2010 to 2018 by quarter
The Employment Cost Index (ECI) measures the change in the cost of labor, free from the influence of employment shifts among occupations and industries. In the third quarter of 2018, the ECI came to 134.3 indicating an increase of labor costs by about 0.8 percent since the preceding quarter.
Tight Labor Market: Small business optimism has plunged in the last three months, in large part due to the inability to hire qualified employees. One example is the oceanfront Isle of Palms, South Carolina restaurant The Banana Cabana. The iconic established closed its doors this season after 27 years in business. Owner Gary Hart told Charleston TV station WCIV that it was difficult to find reliable help in Charleston’s bustling restaurant environment with the tight labor market. From south to north the sentiment is the same. “The problem isn’t just the minimum wage hikes,” says Themis Rizos, a franchisee of two Mikel Coffee Community Stores and Kaptain Jimmy’s Restaurant in South Massachusetts. “It’s the difficulty to find workers. And the hike in the prices of all the materials we buy for our businesses.”
Cost of Money: As stated before, there really is only one way to go with rates, and that is up. Yes, they can hover slightly above the normalized zero rate of recent past, but the future is uncertain, and the end is always near. Is that the Doors? Anyway, free money is receding thanks to increases in interest rates and quantitative tightening, which has led to less liquidity and increased the cost of money for businesses already in debt. Goldman Sachs, among others, expects GDP to fall from 3% in 2018 to 2% in 2019. This scenario would put the squeeze on American small businesses at both ends of their operation. It’s going to lead to higher costs while also reducing revenue through a slowed-down economy.
If you think this can’t happen, think again. In 2008-2009 when the Federal Reserve increased interest rates and the U.S. economy entered a recession, U.S. business failures jumped up to a massive 6,000 per quarter. Let’s keep our heads up in 2019.