Small business owners say economic uncertainty is increasing

Mixed messages about the economy are making it difficult for business owners to figure out how to move forward. “That’s a big question mark.”

Jonathan Echeverri, owner of Pepper Plain Coffee Company, stands in the space that will be used to expand his coffee shop on July 28 in Montclair, NJ.
Jonathan Echeverri, owner of Pepper Plain Coffee Co., stands in the space that will be used to expand his coffee shop on July 28 in Montclair, N.J. (Evelyn Freza/For The Washington Post)

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Construction crews in Montclair, NJ are working overtime on Paper Plane Coffee Company’s $150,000 expansion that will double the size of the store to accommodate growing demand and create a new tasting room and events space.

But if the economy takes a nosedive, owner Jonathan Echeverri already has a plan B. He’ll stop working and trade in cheaper types of coffee beans and local milk that’s a little less creamy.

“It’s a big question mark: We’re growing so fast that we need bigger machines and bigger production facilities, but what will things look like a year from now?” he said. “I’d be lying if I said I wasn’t worried about the recession.”

Two-and-a-half years into the pandemic, small-business owners say they are only just beginning to recover from the sudden blow that left many of them stranded during early 2020 pandemic restrictions.. Since then, owners have faced rising costs, labor shortages and large swings in consumer demand, often affected by cases of the coronavirus in the region.

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Now they are being interrupted by disturbing economic messages that have many wondering what to do. The U.S. economy shrank for a second straight quarter, reviving fears the country could enter a recession. But an unusually strong jobs report this month erased many of those concerns and made it harder and more expensive for small-business owners, especially in the hospitality industry, to find and keep workers.

At the same time, consumer demand for goods has slowed, and borrowing costs are rising, as the Federal Reserve raises interest rates in hopes of slowing the economy enough to stave off decades-high inflation.

“It’s been one hit after another for small businesses, and now we’re in this unusual position where we don’t know what’s going on in the economy,” said Paige Ouimet, Kenan-Flagler professor at the University of North Carolina. Business School. “There’s a lot that’s up in the air, and uncertainty affects small businesses more than large businesses.”

Small businesses—generally defined as having fewer than 500 workers—are a critical part of the economy, employing nearly half of the nation’s private-sector workers. But they have smaller financial cushions and fewer places to turn, especially compared to giants like Walmart, when times get tough.

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Running a business always requires a carefully calibrated balance of supply and demand forces, though Echeverri explains how he manages his coffee company. Feels increasingly uncertain. The price of coffee beans has doubled in the past year, and cook-to-go food items are increasingly out of stock. At the same time, regulars have started stopping weekly deliveries of premium coffee, a luxury that doesn’t fit into their budgets. People who used to come for late four-five times a week now come in half.

“There are a lot of unusual crosscurrents in the economy right now,” said James Wilcox, a professor at the University of California at Berkeley’s Haas School of Business. “For small businesses, that means they’ll have fewer customers than before — which, after all, is the purpose of the Federal Reserve,” trying to stem rising inflation.

In interviews, more than a dozen small-business owners outlined the steps they take to protect against a potential economic downturn. Some have abandoned regular maintenance or are bringing in contract workers instead of hiring full-time employees. Others are stocking much lower-priced goods or canceling deals with retailers like Target and QVC to sell directly to consumers in a way that gives them more control over production and profits. All of these pullbacks, when multiplied across thousands of small businesses, could serve to further cool the economy.

Many business owners say it has become difficult to predict when it might be delayed, or by how much. others Still trying to make up for both labor and supply shortages, they say they are still reluctant to cut back, even if it means eating into profits.

Higher Ground Transportation Services, a company based in Bowie, MD, that provides shuttle buses and vans for groups and events, has a packed schedule this summer. But owner Jan Peters says she’s thinking twice before making the long-term investment.

Peters is still struggling to get her business back to where it was before the pandemic, when she had to lay off all five workers and sell five of her 13 vehicles. Since then she has returned four employees. But she’s also slowly changing her approach: Instead of more full-time workers, she’s bringing in part-time contractors — usually school-bus drivers who are free on summers and weekends. And he began looking for used vans rather than new ones to round out his fleet.

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“Although this summer has been great for us, businesses like mine are still trying to get back to where we were before the pandemic,” she said. “Summer camp is saving us this year. We are having weddings, proms, family reunions again. People want to travel locally, up and down the East Coast. But how long will it last? I honestly don’t know.”

Meanwhile, high prices and supply chain hiccups continue to weigh on his business. Diesel costs are nearly double what they were a year ago, and Peters has had to raise wages by 20 percent to keep drivers from leaving for bigger, higher-paying outfits.

She’s paying more for new vehicles, if she can find them. Production delays have made it nearly impossible to track down full-size vans — so much so that when she recently saw new tags, she followed it down the highway to see if she could track down the dealership it came from. (She can’t. “Other people are dazzled by fancy cars or jewelry, but I just have my eye on new cars,” she said.)

But due to the lack of spare parts, it has become difficult to keep his existing vehicle on the road. One of her Mercedes Sprinter vans, for example, has been in the shop for more than two weeks waiting for a new air conditioning fan, she said, which equates to about $10,000 in lost revenue.

After months of unsustainable rapid growth and rising prices, the Fed began raising interest rates this spring on the assumption that higher borrowing costs would dampen consumer and business demand to cool the economy. Although there are already signs of a slowdown, particularly in the housing market, economists fear that the full impact of higher interest rates could overturn the economy by the end of the year and trigger a recession.

“Business is slowing down, but here’s what’s important: By what magnitude?” said University of Michigan economics professor Betsey Stevenson. “We want businesses to borrow less, but how much less debt? The Fed is trying to get it right by raising interest rates.”

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It’s a tough calculation that’s feeding into business owners’ worries about the future. The percentage of small business owners citing an increasingly uncertain economic outlook rose sharply in July, while overall optimism remained near historic lows, according to data released last week by the National Federation of Independent Business.

At Flicks, an independent movie theater and restaurant in Boise, Idaho, business is slowly recovering after nose diving during the pandemic. (The business lost $900,000 in the first year alone.) Now, new financial uncertainties have put the brakes on renovation plans, which include a $100,000 investment in new seats, until co-owner Carol Skinner turns it back to profitability. She also wants to give raises to longtime employees but says she’s waiting until she feels the economy is on firmer ground.

During the pandemic, theaters installed new air-filtration systems and tried several marketing strategies: selling movie-theater popcorn to-go, for example, and offering curbside DVD and VHS rentals. But even as concerns about the pandemic ease, it has been difficult to win back customers who are accustomed to streaming movies without leaving their homes.

“The last couple of years have been very tumultuous,” Skinner said. “We tried everything we could to make a little bit of money, but it wasn’t really enough. We are optimistic, but we are still in the red. “

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One bright spot, he and many others in the service industry say, is that consumers have shifted their spending away from goods to experiences like dining, entertainment and tourism. The question is how long Americans will keep spending.

Burlington, Vt. Gift shop Common Deer, which specializes in American-made goods, is being hit on both ends: by high wholesale prices and shrinking budgets among its stores. As a result, co-founder Sarah Beal has started stocking more low-priced products specifically for the holidays.

“People who spent $50 on a gift for their niece last year might have a budget of $30 this year, so we have to be prepared for that,” she said. “We take a lot of gambles with retail — you’re buying inventory in advance and hiring people before you need to — that’s harder when you’re not sure what’s going to happen.”

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