The State of Small Business Today

Note: While Bob Johnson is on vacation, we are featuring this video interview in place of his May 16 column. Bob's regular column will resume May 23.

Jeremy Glaser: For morning, I'm Jeremy Glaser. I'm here today with Bob Johnson--he is our director of economic analysis--for a look at the state of American small business. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, investors mainly focus on big publicly traded companies when they're thinking about business. But why do you think that it's worth taking a look at small business as well?

Johnson: A lot of growth in the economy really comes from small business. And not necessarily even just all of the innovative ones, but just the small things like your dry cleaner, your small builder, or what have you--they are all in this category. And what's interesting is that they are a very, very important part of job additions. On a three-month moving-average basis, we've had about 100,000 small-business jobs; large businesses--that's those with over 500 workers--we've only added 30,000 or so jobs on average per month. So, really, the job growth right now is coming out of small businesses, and so that's why it's a very important sector to focus on.

Glaser: We did get a snapshot of small-business sentiment. We've talked about this a little bit before, but can you just give us some color on what that report looked like?

Johnson: Yeah, the small-business sentiment for the month of April came in at 96.9, which is a relatively healthy rate. It's been far less than that when we were in the recession, but typically when we've been in the middle of great recoveries, we've kind of been somewhere around 100 to 105. So, we're still not in that great place where everybody is wonderfully happy.

The good news is that we've been trending around 95 to 98. It got really strong in November and December, and then we fell back with the bad weather in January and February. Now in April, we look a little bit better. It's better than the March reading, so maybe we're back on the upward trend again in this statistic.

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Glaser: Let's look at some of the underlying data there. First, just in terms of the labor market, are small businesses planning on continuing to hire and what are wages going to look like?

Johnson: On the hiring front, I think, again, that ratio moved up. The net plan-to-hire is at 11%, which was up 1% from the prior month, so that's certainly some good news on the overall hiring. And the people who are hiring are actually hiring more people so the ratio each firm is looking for, at 0.14, is a very healthy number. So, we are glad to see that.

On the wage front, a very interesting question: Actual comp, firm's raising comp--and, again, this is net--was up 1% to 23%. So, some good news there on actual increases that have actually been paid. Planned comp is actually always lower--and usually quite a bit lower. When people actually get the profits, they descend to be a little bit more generous. But the planned comp, in any case, is up 1% also to about 14%.

Again, both of those numbers are near recovery high. We're glad to see that, and certainly it seems to indicate that maybe, in at least some places, some of the labor-scarcity issues showed up in a little bit tighter wages.

Then also, if you look at it in terms of that same theme, jobs that are hard to fill went to 27%--which is a high, 3% increase for a single month. So, clearly, openings are very hard to fill and continue to be, and that's going to be a bit of an issue for corporations and small businesses--not so much for the worker who may benefit from all of this.

Glaser: Since the labor picture looks a little bit better, what about capital investment? Are small businesses investing in that as well?

Johnson: Yeah, that's kind of fascinating. I think, at last, we're doing a little better there on a month-to-month basis. The people planning to increase capital expenditures were up a couple percent to 26%. That's generally good news because those are big-ticket items, and it indicates confidence. It also puts more money back in the economy. So, we're really glad to see that.

What's very interesting is that this spending intent is primarily on equipment that goes in their buildings and, secondarily, on automobiles. But the real shocker was that there's not much interest in the real estate portion; people aren't expanding their footprints in a big way. They're not looking to build new buildings or to buy more land, and that's usually been a decent part of the capital-expenditure story. Not this time.

Glaser: So, [does that suggest] that maybe business owners are somewhat cautious about their outlook [regarding] how their sales could look?

Johnson: I think that's a very good question. It relates to the sales number, I think, that we're all seeing. The number of businesses that think sales will increase in the next six to 12 months is only 10% of businesses--down from 13% the prior month. So clearly, if you're not growing sales very much, you don't need massive amounts of more space. And that's certainly one of the themes. And with more businesses going online, that's certainly been another factor, too. So, that's not good news for people building for small businesses.

Glaser: So, what are these owners worried about? What do they think is holding back their businesses right now?

Johnson: With only a reading of 97 and not 100 or 105, that's a great question to ask. And certainly, there are a few things on their minds. The biggest thing in this month's report [is what factors businesses cite as affecting them]. And they do this every month and it goes back a long time and there are many factors in here: insurance or regulation or taxes or competition from big business or inflation. There's a number of factors that they can cite, and it's shifted over time. Right now, the two biggest are taxes and regulatory.

Taxes is coming primarily because of all the new rules in the Affordable Care Act--that kind of complicate things. Also, this month, April, happens to be tax month. They try to seasonally adjust these, but when you get that bill sitting in front you, the taxes seem to creep up every year in the month of April. But certainly, taxes are a big concern. But with the regulatory issue, the laundry list kind of gets long. There won't be any action on the federal level, but there is a lot of minimum-wage action at the state level that scares small businesses. Maybe some of the wage increases are necessary, but certainly that's one of their concerns.

Certainly, there are a lot of Environmental Protection Agency concerns. One, on the energy front, has to do with all the tighter rules on coal; that's potentially going to raise the price of electricity, which has small businesses concerned. Also, surprisingly, they're very concerned about some new regulations coming down the pike on the Clean Water Act that are going to expand from just navigable water to all water. And that's going to put a lot of businesses--anybody with water on their property, so to speak--into a situation where they now have to be subject to this law; they have to go through all the regulatory reviews and approvals and the costs of doing all of that even if they're a small business. So certainly, that's another one of the major concerns out there on the regulatory front.

Also, on the National Labor Relations Board, they've adopted some tighter rules there. That includes what businesses call the "ambush rules," which allow union elections to happen in as little as 10 days from when notification is given. And, of course, small businesses don't have an army of lawyers working for them. They can't kind of fight back, if you will. In 10 days, they can barely find a lawyer, let alone fight back unions coming after them. And so certainly, that's been a concern as well. So, there are a lot of things happening on the regulatory front, and that's why it's the number one or number two worry consistently for businesses over the last couple of years.

Glaser: Bob, I appreciate your take on small business today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.