Small businesses say economic uncertainty is growing

Mixed messages about the economy make it difficult for business owners to know how to proceed. “That’s one big question mark.”

Jonathan Echeverri, owner of Paper Plane Coffee Co., stands in the space that will be used to expand his neighborhood coffee shop in Montclair, New Jersey, on July 28.
Jonathan Echeverri, owner of Paper Plane Coffee Co., stands in the space that will be used to expand his neighborhood coffee shop in Montclair, New Jersey, on July 28. (Evelyn Freja/For The Washington Post)
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Construction crews in Montclair, New Jersey are working overtime to expand Paper Plane Coffee Co. at a cost of $150,000, which will double the size of the store to accommodate the booming demand and create a new tasting room and event space.

But if the economy takes a turn for the worse, owner Jonathan Echeverri already has a plan B. He’ll freeze hiring and switch to cheaper coffee beans and local milk that’s a little less creamy.

“That’s one big question mark: We’re growing so fast that we need bigger machines and bigger production capacity, but what will things look like in a year?” he said. “I’d be lying if I said I didn’t care about the recession.”

Two and a half years into the pandemic, small business owners say they are just beginning to recover from the sudden blow many of them suffered during the pandemic restrictions of early 2020. Since then, owners have faced skyrocketing costs, labor shortages and large fluctuations in consumer demand, often due to the spread of the coronavirus.

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Now they are besieged by various economic messages that leave many wondering what to do next. The US economy shrank for the second quarter in a row, renewing fears that the country could fall into recession. But last week’s extremely strong jobs report removed many of those concerns and made it harder and more expensive for small business owners, especially in the hospitality industry, to find and retain 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 tame inflation, which has hit decades-high levels.

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

Small businesses, usually defined as those with fewer than 500 employees, are a critical part of the economy, employing about half of the nation’s private sector workforce. But they tend to have smaller financial reserves and fewer places to turn, especially compared to giants like Walmart, when times get tough.

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Running a business has always required a carefully calibrated balance of supply and demand, although Echeverri says running his coffee company feels more and more insecure. Over the past year, the cost of coffee beans has doubled, and food that can be taken with you is becoming increasingly scarce. At the same time, regulars are starting to hold off on weekly deliveries of premium coffee, saying it’s a luxury that no longer fits their budget. People who used to come four or five times a week for a latte now come twice as often.

“There are a number of unusual cross-currents in the economy right now,” said James Wilcox, a professor at the University of California, Berkeley’s Haas School of Business. “For small businesses, that means they’re going to have fewer customers than before — which is, after all, the Fed’s intent,” as it tries to curb soaring inflation.

In interviews, more than a dozen small business owners outlined the steps they are taking to protect themselves against a possible economic downturn. Some say they put off routine maintenance or hire contract workers instead of hiring full-time workers. Others are stockpiling more products at lower prices or cutting 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 these setbacks, multiplied by thousands of small businesses, could further chill the economy.

Many business owners say it was difficult to predict when things might slow down or by how much. others are also still scrambling to fill shortages in both workers and inventory, and say they don’t dare cut back just yet, even if it means eating into profits.

Higher Ground Transportation Services, a Bowie, Maryland-based company that provides shuttle buses and vans for groups and events, has a busy schedule this summer. But owner Jan Peters says she would think twice before making a long-term investment.

Peters is still trying to get her business back to where it was before the pandemic, when she had to lay off all five employees and sell five of her 13 cars. Since then, she has hired four employees. But she’s also gradually changing her approach, replacing full-time employees with part-time contractors — typically school bus drivers who are free during the summer and on weekends. And she started looking for used vans, not new ones, to add to her fleet.

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“Even though this summer has been great for us, companies like mine are still struggling to get back to where we were before the pandemic,” she said. “This year, summer camps are saving us. We again hold weddings, proms, family holidays. People want to travel locally, up and down the East Coast. But how long will it last? I honestly don’t know.”

Meanwhile, higher prices and supply chain issues continue to weigh on its business. Diesel costs have nearly doubled from a year ago, and Peters has had to raise wages by 20 percent to keep drivers from leaving for bigger, higher-paying companies.

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

But a shortage of spare parts has made it difficult even to keep existing vehicles on the road. For example, one of her Mercedes Sprinter vans sat in the shop waiting for a new air conditioner fan for more than two weeks, which she said amounts to about $10,000 in lost revenue.

After months of unsustainably fast growth and rising prices, the Fed began raising interest rates this spring in hopes that higher borrowing costs would dampen consumer and business demand enough to cool the economy. While there are already signs of a slowdown, especially in the housing market, economists fear the full impact of higher interest rates could hit the economy later this year and trigger a recession.

“Business is slowing down, but the important thing here is: how much?” said Betsy Stevenson, an economics professor at the University of Michigan. “We want businesses to take fewer loans, but how many fewer loans? That’s what the Fed is trying to fix by raising rates by the right amount.”

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It’s a shrewd calculation that adds to business owners’ anxiety about the future. The percentage of small business owners citing an increasingly uncertain economic outlook rose sharply in July, while overall optimism remained near an all-time low, according to data released this week by the National Federation of Independent Business.

Business at Flicks, an independent movie theater and restaurant in Boise, Idaho, is slowly starting to recover after a downturn during the pandemic. (The business lost $900,000 in the first year alone.) Now, new economic uncertainty has forced co-owner Carol Skinner to put the brakes on renovation plans, which include a $100,000 investment in new chairs, until it’s profitable again. She also wants to give her longtime employees a raise, but says she’s waiting until she feels the economy is on firmer ground.

During the pandemic, the theater installed a new air filtration system and tried a number of marketing tactics, such as selling takeout popcorn in the theater and offering DVD and VHS rentals outside. But even as concerns about the pandemic subsided, it was difficult to win back customers who were accustomed to watching movies without leaving their homes.

“The last two years have been very difficult,” Skinner said. “We tried our best to make some money, but it wasn’t enough. We’re hopeful, but we’re still in the red.”

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One bright spot, like hers and many others in the services sector, says consumers have shifted their spending from goods to experiences such as restaurants, entertainment and tourism. However, the question is how long Americans will continue to spend.

Common Deer, a gift shop in Burlington, Pa., that specializes in American-made goods, is getting hit from both ends: by higher wholesale prices and shrinking shoppers’ budgets. As a result, co-founder Sarah Beal started stocking up on cheaper products, especially for the holidays.

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

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