FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 17, 2017
- Small Business Optimism Index at Highest Level Since 2004
- Small Businesses in Best Financial Shape Since Great Recession
- Trump Spurs Optimism, But Regulatory Burdens Continue
- Conclusions – Are We Getting Too Optimistic Too Early?
- IBD: “Busting Five Big Myths About Obamacare’s Repeal”
Small businesses and entrepreneurs have had a rough time of it for these past eight years. New startups and entrepreneurial activity have pretty much been stagnant, weighed down by heavy regulation, high taxes and an economy that’s just been stumbling along. Yet in November and again December, there were signs of optimism and business renewal that could mark a real turnaround in the fortunes of small business.
The National Federation of Independent Business (NFIB) reported last week that its Small Business Optimism Index soared in December by the most in one month since 1980, a year when another maverick conservative-leaning candidate surprised everyone and won the presidency. His name was Ronald Reagan.
Another report out last week found that small businesses are now in the best financial shape since before the Great Recession based on revenues, cash-flows and sales.
While the economy is still far from healthy, we have seen more positive news since the election. Today we’ll look at these two latest reports on small businesses — and what President Trump will, and will not, be able to do with regard to rolling back onerous regulations early-on in his administration.
Finally, we’ll look at an Investor’s Business Daily editorial last week that blows out of the water the liberals’ scare tactics when it comes to repealing Obamacare.
Small Business Optimism Index at Highest Level Since 2004
The Optimism Index climbed to 105.8 in December, matching its highest level since 2004, with a 38-point jump in the number of small business owners who “expect better business conditions” in 2017. Other indicators such as sales expectations and plans to expand also improved.
“We haven’t seen numbers like this in a long time,” Small business is ready for a breakout, and that can only mean very good things for the U.S. economy,” said NFIB CEO Juanita Duggan.
“The December results confirm the sharp increase that we reported immediately after the election,” said NFIB Chief Economist Bill Dunkelberg. “This is the second consecutive month in which small business owners reported a much brighter outlook for the economy and higher expectations for their businesses.”
“In this month’s report, we are also finding evidence that higher optimism is leading to increased business activity, such as capital investment,” he added. Some 63% of NFIB members reported making capital outlays in December, a significant increase over November.
The other two big movers in the December survey, “Sales Expectations” and “Good Time to Expand,” jumped by 20 percentage points and 12 percentage points, respectively.
Small Businesses in Best Financial Shape Since Great Recession
According to the BizBuySell.com 2016 report, small businesses are now in their best financial shape since the financial crisis — after years of hunkering down during the Obama administration. BizBuySell is the Internet’s largest business-for-sale marketplace. It reported that in 2016, median small business revenue rose 5.2% to $472,798, while cash-flow — the main measure of small business financial viability — rose a healthy 5.4% to $107,551.
BizBuySell also reported that the number of small business sold hit a new high with 7,842 closed transactions in 2016. It said the primary factors for the reported growth in transactions include an improving small business environment, more owners looking to sell, more qualified buyers in the market and better financing options. BizBuySell expects the number of small business transactions to continue to increase in 2017.
Trump Spurs Optimism, But Regulatory Burdens Continue
The last eight years have been challenging for small businesses. They were promised relief by President Obama, especially from burdensome healthcare costs. They got none – premiums soared. They were told the White House would listen to their concerns. They were met with near total indifference.
Instead, they had a record number of onerous federal regulations imposed on them — Dodd-Frank’s punitive financial reforms, Obamacare’s taxes and higher income taxes that directly hit small business owners. President-elect Donald Trump has promised to correct many of these problems. That remains to be seen of course, but most small business owners are optimistic.
While this may prove to be true, it will not happen overnight, and there may well be some disappointment in the months ahead. As I have pointed out in recent weeks, there are only so many regulations that President Trump will be able to eliminate through Executive Orders in his first few months in office.
In addition, much of Trump’s agenda – including his proposed tax cuts which could really boost the economy – require congressional approval. It would seem to be a safe assumption that Trump will get zero support from Democrats on issues such as tax cuts and deregulation. There may even be some Republicans who are reluctant to fall in line, at least early-on.
The point is, most of what Trump wants to accomplish is going to take time.
Many people seem to think that Ford, Carrier, AliBaba, GM and other major companies that have announced plans to boost hiring and investment in the US will drive a booming recovery under Trump. Thus far, however, those announcements are not enough to have a serious impact on the economy.
As always, an economic boom depends on small businesses. Since 2009, small businesses have accounted for over 60% of all new jobs. Small businesses today make up just under half of private sector GDP. Without them, there would have been no recovery at all under Obama.
In short, when small business booms, the economy booms. If the US economy is really going to take off, small business is going to have to carry much of the load.
That’s a tall order. Most of us remember that the number of new business startups fell below the number of business deaths for a couple of years after the Great Recession. While that trend has thankfully reversed, it needs to continue.
Some companies die. That’s a fact of economic life. So long as new businesses are being born, and the labor market is at least somewhat mobile, then these natural dynamics yield higher incomes and living standards. Promising new businesses reinvest capital and drive employment. Indeed, startup firms historically create the vast majority of net new jobs.
In the past decade, however, this source of dynamism has slowed. The ratio of startups in the US has been cut in half since the late 1970s. One in six companies were startups in 1970, whereas only one in 12 is a startup today.
Perhaps more important, the number of new jobs created annually by small businesses open one year or less collapsed from the peak of the dot.com bubble to the end of the Great Recession in 2009 – from 4.7 million to 2.5 million. It had only recovered to 3.0 million in 2015 (latest data available).
And it’s a chronic problem. Economists Glenn Hubbard and Tim Kane wrote this last year:
“Weak startup dynamism highlights a modern problem: Government is discouraging