Politics, inflation pinch as small business confidence rises slower than markets, economy

Small business owners across the U.S. are more confident, but just barely, as fears about price inflation, hiring costs, tax hikes and partisan politics weigh on Main Street as it shows some signs of returning to pre-Covid operating normal.

Almost two-thirds (64%) of entrepreneurs now say their business can survive more than a year under current business conditions, up from 55% last quarter, as the wave of shutdowns and bankruptcies that crushed many Main Street enterprises eases and the country emerges from Covid — new cases being reported have now dropped below 30,000 and more than 100 million Americans are fully vaccinated.

More business owners (34%) describe current business conditions as good, according to the second quarter CNBC|SurveyMonkey Small Business Survey, which saw the Small Business Confidence Index rise from a record low in Q1 of 43 to 45 in the current quarter. But that is still below a score of 50, and a net negative sentiment reading, which first occurred for the five-year-old survey one year ago, in Q2 2020 as the Covid outbreak spread.

“In the middle, confidence wise, is appropriate, because there are still lots of unknowns as far as the recovery,” said Karen Kerrigan, president of the Small Business & Entrepreneurship Council. “Many are still digging out … paying back-rent, getting back to a normal level of revenue,” Kerrigan said.

The percentage of business owners forecasting a revenue decrease over the next year dropped from 27% a quarter ago to 18% now — still, under half (46%) expect revenue to grow.

U.S. GDP is booming, several rounds of stimulus checks have buoyed consumers, and President Biden’s infrastructure plan and spending priorities are expected to provide an economic boost, but on Main Street, views about the president’s ambitions are mixed, and partisan politics factors in the survey responses.

Just over half (51%) of small business owners support Biden’s infrastructure legislation, but there is a divide on Main Street driven by party affiliation, and small business owner support for the plan overall is lower than among the general public.

Almost all (97%) of small business owners who identify as Democrats and Democratic leaners support The American Jobs Plan, but that drops to 55% of independents, and 23% of Republican and GOP leaners.

The tax policy needed to fund the infrastructure plan divides small business owners, with 39% percent of entrepreneurs approving of paying for the American Jobs Plan by raising the corporate tax rate from 21% to 28%, while 59% disapprove. Again, the partisan split is wide, with 85% of Democrats and Democratic leaners, 38% of independents, and 13% of Republican and GOP leaners approving of a corporate tax hike.

“We view this as a fragile recovery and these proposals certainly infuse a little more uncertainty into that,” said Kevin Kuhlman, vice president of federal government relations at the National Federation of Independent Business. Its most recent survey finds small business confidence back at its historical average, after being for nearly a year below that level.

Certain industries within the small business community should benefit from infrastructure spending, such as construction and internet services, but President Biden’s alignment with the labor unions on jobs to be created as part of the plan may dampen expectations among many small businesses that the opportunities will flow to them. “Most companies are not union companies,” Kerrigan said, though she added most do view infrastructure spending positively.

As businesses attempt to get back to normal, finding workers and supply chain issues remain as headwinds for operating at full capacity.

A quarter of small businesses expect their headcount to increase in the next year, up from 19% last quarter, but 24% have open positions that have gone unfilled for at least 3 months, up from 16% in Q1 2020 (the last time the survey polled entrepreneurs on this question.) The economic rebound can be seen in the hardest-hit sector, accommodation/food services, where 34% have open positions and 31% expect to hire more over the next year. More than half (53%) of business owners in the accommodation/food service sector expect revenue to rise over the next 12 months, while only 13% anticipate a further decline.

But during a corporate earnings season which has included wide discussion from CEOs and CFOs about inflation and the price of raw materials, Main Street also is concerned about a price pinch occurring alongside a government push for higher business taxes and a higher federal minimum wage. Just under half (48%) of small business owners say the cost of raw materials will increase the most (compared to cost of labor and cost of capital) over the next six months, with that No. 1 cost concern as high as 79% among those in mining and construction.

“These are real things that impact the business and operations,” Kerrigan said. Global supply chain issues, which have hit businesses of all sizes, and the struggle to find new suppliers, have combined with inflation to limit the small business sector’s ability to get back to a pre-pandemic level of confidence. “They feel squeezed because they can’t raise prices and all the chatter about the potential for inflation has an impact on confidence and how much they invest,” she added.

The influence of personal politics on small business sentiment is evident in the survey responses related to immigration.

The change of administration has caused a secular shift in how Republican small business owners feel about tax, regulatory, and immigration policy, which are core factors in dampening the Small Business Confidence Index reading. Confidence among Republicans rose from 32 to 35 (but it was at 57 in the quarter ahead of the 2020 election).

Meanwhile, 41% of small business owners expect changes in immigration policy over the next 12 months to have a negative impact on their businesses, up from 36% in Q1, and up from 17% a year ago. Overall, 17% of SBOs say immigration is the issue that matters most to them right now, up from 5% who said that in Q1, a rise that led immigration to pass health care policy in the Q2 survey to be viewed as the most important issue on Main Street behind jobs and the economy. Over one-quarter of Republicans (27%) view immigration as the most important factor, versus 9% of independents and 3% of Democrats.

The current crisis at the country’s southern border and surge in migrants has been a challenging headline for the administration, but small business experts say partisan politics is the likely explanation for this shift, more so than any real business impact. In fact, Kerrigan noted that the small business community has been generally pro-immigration reform during the past two decades and Trump immigration policy was a net negative for Main Street. Kerrigan said small business owners also may be disappointed that Biden has not yet shown more action on fixing a broken immigration system that makes it hard to get worker visas.

The CNBC|SurveyMonkey online poll was conducted April 19-26, 2021, among a national sample of 2,201 self-identified small business owners ages 18 and up, using the SurveyMonkey platform. This quarter, the research also included results from 9,225 individuals who do not own small businesses.