The Cost of Doing Business Is Rising, and Small Business Owners Are Feeling The Pinch

What are Americans worried about these days? The war in Iraq? Of course.

But the 1-2 punch of rising inflation coupled with a slowing U.S. economy has many Americans whispering about stagflation, and small business owners are becoming pessimistic about the economic outlook for the second half of 2006; the prospect of further interest rate increases by the Fed is exacerbating the concerns of many business owners.

For more insight, here's a clip from yesterday's press release:

"Small business confidence appears to be waning because of inflation fears, according to a survey by SurePayroll, the nation’s largest online payroll service provider for small businesses.

Small Business Owner Optimism Plummets

From May to June, small business confidence, based on the number of small business owners describing themselves as optimistic about the economy, dropped a surprising 24%.

'We’ve seen slow hiring and rising salary costs in recent months, leading indicators of an inflationary environment,' says Michael Alter, president of SurePayroll. 'But we had no idea how radical the effect would be on the spirit of the small business owners. Many have quickly gone from the height of optimism to believing the bottom’s falling out — and that’s scary.'

Based on the June survey, 59% of respondents indicated they are optimistic about the economy, whereas the balance of respondents (41%) declared that they are pessimistic about the economy.

That’s a significant drop in optimism relative to SurePayroll’s May survey, in which 78% responded that they felt optimistic about the small business economy, with the remainder, 22%, indicating that they were pessimistic.

Inflation Fears Rising

Nearly two-thirds (63%) of surveyed small business owners believe inflation will have a negative impact on their business in 2006.

Many of the comments received during the survey process suggest that the fear of inflation may be dampening optimism even more than actual inflation:

• One coffee shop owner noted that 'the less disposable cash that our customers feel they have, due to rising interest rates and higher mortgage rates, the less they spend on entertainment-coffee.'
  
• A musical products e-retailer commented that 'I am somewhat concerned that increased shipping costs will decrease what customers have to spend on our products and increase our costs to obtain them.'

Other small business owners are clearly suffering from the effects of actual inflation, not just the prospect of future inflations:

• A provider of driver education courses was quite blunt on the topic: 'Fuel costs are killing me.'
  
• 'It's not good right now. I'm hoping it will get better soon so I'm not out of business.'

The majority of surveyed small businesses (53%) have seen their costs of doing business rise over the last several months.

Despite rising costs, many have been hesitant to pass along cost increases to their customers. Of those businesses that have incurred increasing supply costs, the vast majority (79%) have not raised their prices to pass along their increasing expenses to their customers.

However, 35% of those respondents are contemplating raising their prices in the future. In contrast, only 9% of those who have not experienced supply cost increases are contemplating raising prices.

No Cure, Thank You Very Much

The de facto cure for inflation is raising interest rates, which can have a cooling effect on the economy. However, despite their concerns about inflation, 78% of respondents believe the Fed should not raise interests in late June.

One survey respondent noted that 'While I am concerned about inflation, I am more concerned that climbing interest rates will make it more difficult to secure affordable loans.'

About SurePayroll’s Economic Commentary

Every month, SurePayroll publishes its small business economic indicators via the SurePayroll Small Business Scorecard. Based on employee and contractor paychecks for over 16,000 small businesses, SurePayroll’s indices give insights on small business hiring, salary levels and reliance on contractors. SurePayroll regularly augments its data indices with surveys on a variety of topics of interest to small business owners."

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