For over the past year and a half many surveys have reported rising optimism among small business owners. Most recently, the U.S. Chamber of Commerce - an organization that represents the interests of more than three million businesses of all sizes - announced the largest increase on record for its quarterly small business index that it conducts with insurance company MetLife. More than two-thirds of the businesses that participated in the survey said they have a positive outlook for the coming year.
Of course, that's good news - and it's not hard to understand why. The economy is growing, people are working, regulations have been loosened and a pro-business administration is running Washington. But - and maybe it's just the accountant in me - I can't help but think that we may be just a little too confident. Why? Well, I hate to rain on the party, but here are a few of my concerns as we finish out 2018.
Healthcare costs are rising.
Healthcare costs are projected to significantly increase in 2019. The reasons for this increase are many. The ending of the individual mandate, along with more exemptions for certain companies that were once required to provide health insurance will reduce the market of insurance buyers. President Trump's withholding of subsidies, an increased scrutiny of hospital and pharmaceutical companies' billing practices and more hurdles for people trying to enroll on the insurance exchanges are forcing many insurance companies to pull back coverage or increase rates. This is a big problem for businesses because health insurance is one of our most significant expenses.
But there is some good news: more choices coming.
"There are options," Tom Sullivan, the Chamber's Vice President of Small Business Policy told me. By this he means new rules allowing businesses to form "association" health plans and to offer less-expensive "skinny" plans to their employees. "Controlling healthcare costs will continue to be a challenge," Sullivan said, "But businesses will have more ways to address this cost then they've had in years past."
Tax reform has some drawbacks.
Sullivan is very bullish about tax reform - and he has reason to be. Tax rates in 2018 are now significantly lower for most corporations and "pass-through" entities than in 2017. Certain deductions have, for things like investing in capital equipment and purchasing automobiles, increased. Personal rates have also fallen for many as well and more deductions and credits are available. "Tax reform will be an enormous driver for small businesses this year," Sullivan said. "We've waited a long time for this."
I'm in agreement, but I still have some concerns. For starters, I'm not sure most businesses truly understand the impact of tax reform and how it will affect their companies. To them, I say please meet with your accountant as soon as possible and do this analysis. More importantly is the cost of tax reform. Lower taxes will drive growth and help employers make more investments and hire people. But, longer term, the potential deficits it could create (an estimated $1 to $4 trillion in the next ten years, according to some analysis) could have a damaging impact on the government's ability to raise finances and pay its bills. Currently, six percent of the federal budget goes to interest and as this share rises in the future, the money will have to come from - or out of - somewhere.
Interest rates are going to double.
Current interest rates - which are hovering near 1.5 percent - are historically low. The Fed has plans to increase rates over the next two years to as much as 3 percent as the economy continues to grow. 3 percent is still pretty low. But it's also a doubling of rates in a relatively short time period. This may be good for the banking industry, but it will certainly cause many businesses to re-evaluate their budgets and take proactive steps to lock in rates and secure financing as quickly as possible. A budget item that doubles is a concern for any manager trying to control cash and deciding where to invest money and an interest rate increase may very well eat into the tax reform benefits that businesses are expecting.
Workplace issues continue to drive up costs.
"Finding and keeping good employees is the number one challenge we're hearing from our members," Sullivan said. "This challenge is going to continue into the foreseeable future."
A tight labor market is making it harder to get good, skilled people and its effects are just beginning to drive up wages. In addition, many regions around the country are raising minimum wages and the federal government may do the same in the next year or two (the Trump administration supports an increase from the current $7.25 per hour to somewhere around $10-11 per hour). The Department of Labor is planning on increasing the wages where certain salaried workers are entitled to overtime. The Equal Employment Opportunity Commission is continuing its busy schedule of pursuing companies that are discriminating or harassing minorities.
None of this is bad news for the employee and most employers I know are sympathetic. But costs are costs, and the increased scrutiny on workplace issues - from office romances, questioning salary history, drug testing and hiring practices - adds another regulatory (and financial burden) to a company. No one, not even Sullivan, predicts an end to this trend anytime soon.
Markets are unstable.
The rise and fall of markets has an enormous impact on the psyche of consumers. When stocks are up and stable people feel wealthier and are more willing to open up their pocketbooks. Fluctuations create uncertainty and hold back buying. Unfortunately, there has been a lot of uncertainty over the past few months, with the Dow Jones rising and falling by hundreds of points in a single day, exchange rates wavering and interest rates on the increase. The internet and social media have created an environment where a sneeze by someone in China causes a meltdown in New York. Business owners are challenged to find a relatively calm place to invest their profits and are always concerned about the buying plans of our easily-shaken customers.
Finally, the mid-terms are looming.
While not making any predictions, Sullivan admits that any election year brings changes that could affect business owners. This year is, of course, no different. With virtually all of Congress up for grounds, this year's mid-terms could potentially see a changeover in Congressional control. The result could mean a re-visiting of tax reform, changes in healthcare and even potential impeachment proceedings against the President. Business people like certainty. We try to avoid surprises. Unfortunately, and considering recent history, there's no certainty when it comes to the U.S. elections.
But let's not panic, though OK? Things are good right now. The world is (still) relatively at peace. Capital is very accessible. The economy is growing. A pro-business sentiment pervades in Washington. I get it that these factors, and others, are making most business owners feel confident about the future. But my job is to look at risks and there are quite a few we're all facing in the coming months. Enough to temper my confidence, just a little.
Note: The U.S. Chamber of Commerce is a client of my company, The Marks Group PC. However, I have received no compensation from them to write this piece.