Small businesses say economic uncertainty is growing

Mixed messages about the economy make it difficult for business owners to know how to proceed. “That’s a big question mark.”

Jonathan Echeverry, owner of Paper Plane Coffee Co., stands in the space that will be used to expand his nearby cafe in Montclair, NJ, July 28.
Jonathan Echeverry, owner of Paper Plane Coffee Co., stands in the space that will be used to expand his nearby cafe in Montclair, NJ, 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., which will double the size of the store to meet burgeoning demand and create a new tasting room and a event space.

But if the economy takes a turn for the worse, owner Jonathan Echeverry already has a plan B. He will suspend hiring and switch to cheaper varieties of coffee beans and slightly less creamy local milk.

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

Two and a half years into the pandemic, small business owners say they are just beginning to recover from the sudden hit that shackled many of them during pandemic restrictions in early 2020. Since then, owners have faced soaring costs, labor shortages and wild swings in consumer demand, often influenced by coronavirus cases in the region.

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Now they are beset by divergent economic messages that have many wondering what to do next. The U.S. economy shrank for a second consecutive quarter, rekindling fears that the country could slip into a recession. But an unusually strong jobs report last week eliminated many of those concerns while making it harder and more expensive for small business owners, especially in the hospitality industry, to find and keep workers.

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

“It’s been one blow 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 University professor Paige Ouimet. from North Carolina. Kenan-Flagler School of Commerce. “There is so much in the air, and the 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 that employs around half of the country’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 between the forces of supply and demand, although Echeverry says he runs his coffee business feels more and more uncertain. The cost of coffee beans has doubled over the past year and take-out food items are increasingly out of stock. At the same time, regulars are beginning to suspend weekly deliveries of premium coffee, claiming it’s a luxury that no longer fits in their budget. 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 cross-currents in economics right now,” said James Wilcox, a University of California professor at the Haas School of Business at Berkeley. “For small businesses, this means they will have fewer customers than before – which, after all, is the Federal Reserve’s intention” in trying to rein in soaring inflation.

In interviews, more than a dozen small business owners described the steps they are taking to hedge against a potential economic downturn. Some say they are delaying routine renovations or bringing in contract workers instead of hiring full-time employees. Others are stocking more products at lower prices or canceling deals with retailers like Target and QVC to sell directly to consumers in ways that will give them more control over production and profits. All of these setbacks, when multiplied across thousands of small businesses, can contribute to further cooling the economy.

Many business owners say it’s been difficult to predict when things might slow down or by how much. Others are still trying to make up for labor and supply shortages and say they are reluctant to cut spending just yet, even if it means cutting back on profits.

Higher Ground Transportation Services, a Bowie, Md. company that provides shuttles and vans for groups and events, has a busy schedule this summer. But owner Jan Peters says she thinks twice about making long-term investments.

Peters is still struggling to rebuild her business where it was before the pandemic, when she had to lay off all five workers and sell five of her 13 vehicles. Since then, it has rehired four employees. But it is also gradually changing its approach: instead of having more full-time workers, it uses part-time contractors, usually school bus drivers who are free in the summers and on weekends. And she started looking for used pickups rather than new ones to supplement her fleet.

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“Even though this summer has been great for us, companies 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 redo weddings, balls, family reunions. People want to travel locally, along the east coast. But how long will this last? Honestly, I do not know.

Meanwhile, rising prices and supply chain issues continue to weigh on his business. Diesel costs are almost double what they were a year ago, and Peters has had to raise wages by 20% to stop drivers leaving for bigger, better-paying companies.

She also pays more for new vehicles, if she can find any. Production delays have made it almost impossible to find full-size vans – so much so that she recently saw one with new labels, so she followed it off the highway to see if she could find the dealer for it. where she came from. (She couldn’t. “Other people get into cars or expensive jewelry, but I just had a look at the 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 store waiting for a new air conditioning fan for more than two weeks, she said, representing a lost revenue of around 10,000 $.

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

“Businesses are slowing down, but what matters here is: how big? said Betsey Stevenson, professor of economics at the University of Michigan. “We want companies to take out fewer loans, but how many fewer loans? That’s what the Fed is trying to do by raising rates just enough. »

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It’s a tricky calculation that fuels 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 Businesses.

At Flicks, an independent movie theater and restaurant in Boise, Idaho, business is gradually starting to rebound after taking a nose dive during the pandemic. (The company lost $900,000 in the first year alone.) Now, new economic uncertainties are prompting co-owner Carole Skinner to stall renovation plans, which include a $100,000 investment in new seating, until until it makes a profit again. She also wants to give long-serving employees a raise, but says she’s waiting until she feels the economy is on firmer footing.

During the pandemic, the theater installed a new air filtration system and tried a number of marketing tactics: selling takeout movie theater popcorn, for example, and offering DVD and VHS rentals. at the edge of the street. But even as pandemic concerns have eased, it has been difficult to win back customers who have grown accustomed to streaming movies without leaving their homes.

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

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The only bright spot, she and many others in the service industry say, is that consumers have shifted their spending from goods to experiences like restaurants, entertainment and tourism. The question, however, is how much longer Americans will continue to spend.

Common Deer, a Burlington, Vermont gift shop specializing in American-made products, is being hit on both sides: by rising wholesale prices and shrinking budgets for its shoppers. As a result, co-founder Sarah Beal began sourcing more affordable products, especially for the holidays.

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

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