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In general, the outlook for small businesses for the remainder of the year will still be positive but expect to see emerging headwinds in the second half of 2022. The economy’s continued reopening will benefit the small business sector in particular. However, as overall economic growth slows, interest rates rise, and inflation remains elevated the environment will become more challenging.
Here’s an update on the top economic forces impacting small businesses in Q2 2022.
New Business Formations
According to Intuit, over 17 million new small businesses will start in the U.S. in 2022. Surveys indicate new business formation was accelerated by the pandemic as workers quit jobs in record numbers to become their own bosses. Data shows business applications at historically high levels since late 2020.
Economic Tailwinds
Here are the economic factors working in the favor of small businesses:
Improved Capital Markets
After credit conditions tightened during the pandemic, financial institutions are once again lending to small businesses. Financial institutions report continued improvement in the credit quality of small business applicants with loan approvals increasing across all sizes of business.
This should bode well for small businesses looking to expand and invest in new capital and equipment to drive growth, productivity, and margins. However, higher interest rates are already impacting small business loan demand and will likely act as a headwind for growth in the sector in the second half of the year.
Return of In-Person Shopping and Dining
Brick and mortar retail and dining should see continued strength in the second half of the year.
Economic Headwinds
The small business sector can expect challenges from the following directions in Q2 2022:
Technology
As a result of increasingly tight labor supplies, small businesses are pivoting to more digital/online sales, automation of any and every aspect of their operations, utilizing big data/data analytics to make themselves and their workforce more productive, and enhancing their cyber security as they emphasize technology more in their businesses.
Hybrid Work
Like larger employers, small business owners are also making the pivot to hybrid work arrangements to attract and retain employees.
Compensation
The NFIB reports that 49% of owners raised compensation in the past three months with 28% planning increases in the coming three months. These represent 48-year survey record highs.
Inflation
Over 70% of small business owners report raising prices in response to higher input costs with the wholesale, construction, agriculture, and retail sectors noting the most significant increases. Inflation is by far the top issue impacting small businesses as it is becoming increasingly difficult to pass on price increases without affecting sales/demand.
Inflation is clearly impacting consumer spending and 18% more small businesses expect sales to decline rather than getting an expected increase in the coming quarter. The combination of higher prices and higher interest rates are cited as the primary drivers of this decrease in optimism.
Supply Chains
Supply chain disruptions are affecting nearly every small business sector. The majority of small businesses report lost sales and revenue opportunities due to supply shortages.
The outlook is for supply chains to improve gradually throughout 2022 and 2023. Not only will this alleviate inflation pressures on many inputs, but it should also reduce lost sales opportunities.
Profitability
Small businesses have already seen profit margins decrease over the past six months. This has been primarily driven by higher input costs and the inability to pass on all of those increases to customers.
With the majority of owners expecting sales to soften in the second half of the year, profitability will continue to be challenged.
Labor
While there is still some available labor in most markets, it has become increasingly difficult to attract and retain workers. According to the National Federation of Independent Business (NFIB), 47% of small business owners reported job openings they could not fill in March. Hiring is most difficult in the transportation, construction, and manufacturing sectors. Expect this trend to continue as labor markets tighten significantly by year-end and remain tight for years to come.
Conclusion
Many small to mid-sized businesses are currently drowning in the waters of the critical labor shortage. A Professional Employer Organization (PEO) is a company that specializes in the management of administrative and human resource functions for businesses. PEO providers can offer struggling organizations a lifeline to help solve staffing issues by improving recruitment and retention efforts, and by streamlining the hiring and onboarding process.
When you work with SWBC PEO, you’re gaining the guidance of a team of experts who will take the time to get to know your business, help identify current staffing problems, and offer knowledgeable advice on how to attract top talent, reduce employee turnover, and keep your business on track through the current labor market disruptions.
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