With fears about China's economy shaking global markets, Wall Street's jitters have led to a roller coaster of a week. Panic set in after losses on Wall Street last week and a more than 1,000 drop in the Dow Jones in the first few minutes of trading on what is being called "Black Monday" on August 24.
The question I'm often asked is how stock market losses impact small businesses. In the short term, not very much. A bad day on Wall Street likely won't mean that people will cancel their restaurant reservations.
Much of the impact is psychological. When the stock market goes up, people are happier. Their investments are worth more, and they feel like they have more money in their pockets and, importantly, more money saved in their retirement accounts. Thus, they are more willing to spend money, which is good for small businesses. Families may be more apt to take a weekend trip, which is good news for gas station owners, restaurateurs, hotel operators, amusement parks, and the like. Rather than cook, people will go out to eat and splurge for an extra round of drinks and dessert.
Should American small business owners be worried about the proverbial price of tea in China and other economic issues in the world's most populous nation?
Yes and no.
The local ice cream shop probably won't feel a thing on a humid August evening. However, a business that exports goods to China may feel a pinch. A prolonged economic slowdown in China would impact the country's appetite for American-made goods, as the goods would be viewed as costly during tough economic times. It is important to remember that most small businesses make their money on domestic spending and, after years of slow but steady growth, the U.S. economy is relatively strong.
A prolonged stock market slump, of course, will have negative effects on small businesses. Generally, when the stock market is up, cash is more free flowing for investment, and small business owners searching for capital are more likely to have an easier time finding it. When entrepreneurs cannot find funding, it thwarts economic growth. Shaky stock markets across Asia quickly rattled U.S. investors. A longer term slowdown would certainly have a negative impact on small businesses, but a few hiccups in August should not cause panic for entrepreneurs.