Falling Profitability Hurting U.S. Small Businesses

A decline in business profitability is causing pain among small business owners, who are growing more pessimistic about their economic future.  Small business profitability slumped in the first quarter of 2016, with expectations of weaker earnings for the near future, according to a new study by the National Federation of International Businesses.

“Earnings trends worsened 1 point to a negative 22 percent reporting quarter on quarter profit improvements. Far more owners are reporting profits lower quarter to quarter than higher,” said the report.

A decline in business profitability is causing pain among small business owners, who are growing more pessimistic about their economic future.  Small business profitability slumped in the first quarter of 2016, with expectations of weaker earnings for the near future, according to a new study by the National Federation of International Businesses.

“Earnings trends worsened 1 point to a negative 22 percent reporting quarter on quarter profit improvements. Far more owners are reporting profits lower quarter to quarter than higher,” said the report.

The study also found profitability is likely to weaken further because of declining available skilled labor, a trend that the Federal Reserve has promoted by targeting a higher labor force participation rate and lower rate of joblessness.

“The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem was unchanged at 12 percent. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees,” said the NFIB.

“Mess” of Government Policy

In a screed arguing for a libertarian approach to business regulation, NFIB Chief Economist, William Dunkelberg, wrote that government policies are spelling disaster for small businesses.

“Two of our largest states have passed a $15 minimum wage, preventing millions of lower skilled and young workers from ever getting their first job. None of this makes sense to Main Street businesses or many consumers who think government economic policies are “bad” by a 2 to 1 margin,” he wrote, adding that this has been a disaster for businesses.

“The ‘mess’ we are now in is the cumulative result of decades of misdirected, special interest policies, attempts to redistribute income and manipulate private sector firms with volumes of regulations and taxes.”

Larger corporations are also expected to see weaker earnings, although analysts attribute this to higher competition and constrained revenue growth rather than labor costs. Several investment banks have warned that public company earnings could fall by 9% in aggregate during this first quarter earnings season. Aluminum maker Alcoa released earnings results earlier this week, and showed weaker profitability as revenues collapsed by nearly 15% on a year over year basis.

Some economists believe weak revenue growth is a result of combined pressures from stagnant wage growth among America’s middle class and falling demand growth abroad as popped asset bubbles and falling commodity prices hurt foreign consumers.

Counter to Dunkelberg’s narrative, these economists see a need for stimulative monetary and fiscal policies to rejuvenate aggregate demand, adding that a lack of inflation, despite improving labor data, suggests a secular reticence to buy goods and services among a shell-shocked public still recovering from the Global Financial Crisis. The NFIB acknowledged a lack of inflation in its study.

“In spite of the Fed’s best efforts to generate inflation (an event most citizens would not want), inflationary pressures remain dormant on Main Street. Seasonally adjusted, the net percent of owners raising selling prices was negative four percent, for the third month in a row,” the NFIB said in its study, adding a plea to the Federal Reserve to raise inflation.