Take Five: Soaring small business confidence is for real
As part of their “Economic Road Show,” Bill Dunkelberg of the National Federation of Independent Business and Visa Inc.’s Wayne Best visited Madison recently, spreading good news about the U.S. economy and the state of small business. Dunkelberg, the NFIB’s chief economist, and Best, the head of business and economic insights for Visa, have their finger on the pulse of business — Dunkelberg because of the NFIB’s research into small businesses and Best because of how closely he tracks the trillion-dollar payments industry.
In the following Take Five interview, they explain why they are so bullish on the economy — “This is some of the best stuff we’ve seen in 45 years of talking to small businesses,” Dunkelberg notes — but also why the U.S. might fall short of the 4% growth of past expansions.
IB: Is the economic data really as good as it looks?
Dunkelberg: We’re in the second longest expansion in our history, and they [small businesses] played a major role in that, keeping us going for eight years when growth was slow, and then accelerating growth by 50%, from 2% to the 3% growth that we have now, which is massive and really accelerating us into the next few months, and we hope into the next few years. The message is really good across the board.
IB: I’ll put you on the spot — do you give President Trump credit for this?
Dunkelberg: I give all the credit to small businesses because they are the ones who get it done. What Trump’s election did was shock us all, and then in the minds of small business owners, at least a majority of them, apparently it meant a major change in the management team in Washington, D.C., which meant a whole different set of economic policies, very different than what the opposition was promising. They didn’t know immediately what the tax policy was going to be, or what was going to happen with trade or immigration or any of these things, but they felt it was going to be better than anything they would have had if the election had gone the other way.
IB: Wayne, what’s your main message?
Best: There are two messages. The first is related to the overall national economy doing extremely well with pretty much a full-employment condition. Everybody who wants to work is working. What we’re seeing now is stronger levels of growth nationwide, with very few exceptions. Spending growth is strong. The consumer is in a very good place right now. Their net worth is increasing. With the housing market continuing to do very well, we have very few people left who are underwater on their mortgage.
Again, the strongest point is we see very strong employment growth, and that’s very positive for the economy. It ends up resulting in a good amount of [consumer] spending that we’re seeing overall. They are doing very well, and that obviously bodes strongly for businesses, but when you have this level of confidence that consumers have, and the fact that they are working, their parents are working, their neighbors are working, and their friends are working, that bodes well for continued consumption and a broad level of economic growth.
IB: Bill, do you agree the strong consumer confidence has legs?
Dunkelberg: I do. Consumer confidence went up as business owner confidence went up, and interestingly, one of the questions the University of Michigan survey asked was: Do you think government policy is good, fair, or poor? The net percent that said ‘good’ turned positive in April for the first time since 2002, so consumers now think the government is doing the right thing. Now they see some of the policies and that makes them comfortable with making decisions out into the future — like buying cars and buying houses and starting new businesses.
IB: How would you assess the overall state of small business today?
Dunkelberg: Overall, it’s hard to find a time in the last 45 years when small business was doing better and felt better about the economy. Its major problem now, interestingly enough, is finding qualified workers rather than worrying about taxes or worrying about regulation, both of which have improved. So small business is running on all cylinders — a very powerful engine driving economic growth — and we expect it to continue through this year and into next year.
Best: The data certainly points that out. They are spending. In many cases, they are looking to expand their business. Some of the tax law changes that have just gone into effect, and with the immediate expensing of investments over the next five years, we might actually see a run up in spending or investing that actually occurs because that goes away after five years. It’s a really interesting duality we’re seeing with regard to both business and consumers. Bill and I have been doing this Road Show around the country for a number of years, and I always end up being the positive one because the consumer has done relatively well since the recovery began. The business confidence was very much down until November of 2016, and so I’ve been taking the good side and he comes up and gives the negative view. Now we’re actually going to be going around the country talking about a very different picture, which is important.
IB: Will tax reform help the pass-through businesses, the S-Corps, as well as the corporations [C-Corps]?
Dunkelberg: Yes. This is the first tax bill I can remember where the regulators and Congress actually paid attention to the small businesses. They always talk about the small businesses and how important they are, but the best that usually happens is just a cut in the tax rate, which is fine, but this law was much more concerned about the small business sector. We saw a couple of provisions in there, including the 20% credit for pass-through organizations. It’s a little confusing as to who qualifies and so on, so it will take the rest of this year to find out [as regulators write the new rules]. We still have to find out what the real details are, but obviously paying attention to the pass-through and the S-Corps was really a good move. Although they are a little bit uncertain about it, they are pretty happy.
We talked to our members recently, and 50% plus of them are convinced they will have a big break on their taxes. When we ask them about what they are going to do with the money, the first thing they said was grow the business. We’re going to invest it in the business, so capital spending, and we have a certain percentage saying it’s a good time to expand our business at record high levels, and they say they’re going to hire more people.
IB: What about wages?
Dunkelberg: They also say they will pass it on in terms of higher comp. The percentage of our owners who are raising comp is at a 45-year record high level — 33% net. That’s what you have to do in a market where finding qualified workers is your top business problem.
Best: There is some limitation on the qualified business income.
Dunkelberg: We just haven’t figured that out yet. The basic issue is they want to tax income but not business related stuff. If you have a pure income business, then you’re going to have a hard time qualifying under Section 199A, but if you’ve got all this other stuff going on that normal businesses do, then there will be a 20% break available to you.
The Trump factor
IB: It’s kind of a nerve-wracking thing, but are you starting to see a method to Trump’s madness when it comes to raising tariffs as a way to get our trading partners to the negotiating table in order to get more favorable trade deals?
Dunkelberg: Whenever you change something like this, it generates a lot of uncertainty, and uncertainty is the enemy of market prices for stocks and bonds. The optimistic view is there were things that needed to be done in these trade deals. They were set a long time ago. We, as a country, have always been very generous in letting people take advantage of us and use our wealth to help grow their economies, but there are some changes that probably need to be made. The strategy, as I look at it, is ‘let’s stir the pot.’ Trump is really good at taking an extreme position for starters and then working back. Since everybody wants trade and now we’re very dependent on trade with each other, we’ll see some good changes, reasonable changes, in the trade agreements and everything will continue on as it always has, including with China. They need us and we also need them, and that dependency means you reach agreement. You don’t go to [trade] war.
Best: It’s just the ability to negotiate something that for the longest time has been pretty well fixed in nature. I think it’s been generally positive. Volatile, yes, because of the uncertainty factor, but in general it has a chance to have a very positive outcome. We’ve looked at various economic scenarios about what a trade war would mean, and depending on what scenario you look at, the impact to China would be one percentage point less GDP growth in their economy and about 0.2% less for us because of the imbalance of trade.
NAFTA [the North American Free Trade Agreement with Canada and Mexico] would be a different issue. Obviously, it would have a pretty big impact on Mexico, and a little less so with Canada because of previous agreements that we’ve had in place with them.
Dunkelberg: Every few years we send out a list of 75 business problems and ask our owners to rank them from worst to least. Foreign trade is usually 75 on the list, so it’s not a big issue for small business. Most small businesses are in the service sector. Some sell imports, so that’s important, and some of our manufacturing firms are impacted by rising steel prices, but for the most part we watch it as a macro issue. We don’t want it to hurt the economy because we’re part of it, but the direct impact is less important.
IB: Bill mentioned services, and Wayne, one of the things I wanted to ask you directly is in regard to the aging population and how that’s impacting the kinds of businesses that are forming — more service-related — and the kinds of services that existing businesses provide. What’s the evidence that they understand the need to make those kinds of adjustments?
Best: The amount of spending of those over 50 is very large. It’s 50% and also there are many of them. Millennials are not yet at their peak spending years, and we still have a ways to go before that happens. The baby boomers are definitely in that position, and companies were taken by surprise by that. It’s just something that’s creeping up on you in terms of the number of people that are moving into that level of spending. As we evidenced, that group of people is very tech savvy. They have phones. They know how to use them. They are buying online. The data, when we put that together, was a bit of a surprise because retailers think that [tech savvy] is a feature of millennials, and that’s just not the case now. They are buying online more frequently now than they have in the past and businesses have had to react, and so we’ve seen a pretty massive increase in the omni-channel presence of many retailers where they not only have people shopping in the store but also shopping online.
The interesting aspect of this is the baby boomers that do both, and for many major retailers in this country, that has been a strong area of growth. That includes buying something online and even picking it up in the store. What those retailers are finding is that they are picking it up in the store, and they are also doing some additional shopping. So it’s an additional avenue for them to come into the store and maybe buy other items also.
IB: For those interested in retail, would you recommend just an ecommerce approach at first before opening a brick-and-mortar store?
Best: You have to look at the data, and the fact is that people are moving more and more to an ecommerce type of presence, and part of that is because they are time stretched and it’s convenient. The ability to do that is becoming easier and easier, too. In the past, when you wanted to create an online presence, that was a very expensive proposition — developing a website, having your product up there, etc. New apps have made that much easier to do.
To say they should not create a brick-and-mortar presence, you have to look at both of them pretty holistically and do them almost simultaneously. That allows for additional customers beyond the actual service area of where you’re actually located. Building a brick-and-mortar store in the middle of San Francisco obviously is going to have a tremendous amount of traffic, but when you’re in Madison, Wisconsin, maybe a little less so, and having an opportunity to sell your products to a much wider audience, maybe even to people out of state, can be very beneficial.
Dunkelberg: People are more adaptable than we give them credit for, and the participation rate among older people in the labor force is rising. Maybe it’s because we need to work or because we’re too healthy to retire and sit in a chair and watch TV. As Wayne has pointed out, we’re much more interested in experiences now, spending our money on going places, concerts, and things like that.
Best: They are healthier, but they are also better educated, too, than previous generations. As a result, work creates a form of identity for them. That’s why we’re continuing to see them stay longer in the workplace. Part of it is that a lot of them were decimated by the stock market crash, but in many cases it’s these other factors — healthier, better educated — and it’s playing out in terms of the types of spending they are doing. We’re now starting to see two distinct spending patterns starting to emerge. Previously, it was getting away from stuff and more toward experiences, but our data indicates it’s not much more of a conspicuous versus an inconspicuous consumption. To say it better, it’s visible-related spending and quality-of-life spending.
Even mattresses — people are spending upwards of $3,000 to $5,000 for their mattresses. So it’s a quality-of-life type of spending movement that we’re seeing.
The 3% economy
IB: When the second quarter GDP numbers come out, do you expect it to be closer to 3% or 4%?
Best: I’d probably put it closer to 3% with the underpinnings of a robust consumer and with the spending they are doing and likely to continue doing because of the strong employment condition and a little bit more of wage growth. But the uncertainty factor is whether businesses going to make the necessary investments, and there are many that they can make — supply chain upgrades, digitalization of supply chain, and e-payments. All of that is very difficult because you have to work it into existing systems, and that business investment side of corporate activity is still an unknown. If that surprises to the upside, we could see closer to 4% growth, but we’re likely to see much closer to 3%.
Dunkelberg: When you say closer to 3%, I’m over 3%. I agree that our data in a model would predict stronger growth than we’re going to get because we aren’t going to be able to hire the people to staff up for the growth we’re optimistic about in terms of expected sales and so on. The other thing is that if consumer spending goes up, a lot of it is on imports. It’s just the mathematics of the GDP calculation. If you buy a car that’s made in America, that’s good and it goes into GDP. If you buy a car but it was made in Germany, we subtract it because we didn’t generate the income here.
IB: Given today’s labor shortage, isn’t it now more incumbent on businesses to do job training themselves?
Best: It really is incumbent on businesses to ramp up their training expenditures, especially in small businesses where it’s been very noteworthy. Obviously, they don’t have economies of scale because spreading your training costs over five or six people is much more difficult, but businesses are indeed making that investment and for several reasons. One of them is that the jobs that are being created, or the movement within companies, is toward digitalization and requires an investment in training. There are new things that people need to know, and also you have the millennials and now the freelancers, the people sitting on the side doing specialized tasks, that have to be better trained also. So businesses are making those investments, and it certainly behooves businesses to continue to make those investments to make their positions attractive, especially with the wage growth we’ve seen recently.
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