Why 2015 Isn’t As Good As We Thought It Would Be

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(This post originally appeared on Inc.)

Was it only last October that I wrote here about how small businesses were so confident heading into 2015? Wow.

“There have been no less than eight surveys that, for the most part, all say the same thing: Small-business owners are feeling pretty darn good.” I confidently said back then. “… in a month where the world seems to be falling apart, it’s comforting to know that the great majority of America’s small businesses still see the glass as half full. But then again, what else would you expect?”

Unfortunately, two reports came out this week that show just how overconfident we were.

Yesterday, the National Federation of Independent Business’s Small Business Optimism Index showed a small uptick after reaching a 15-month low. Some interpreted this as a positive sign, and it was. But it wasn’t great. “Overall, the index clawed back a bit from the loss in June, but the best that can be said about it is that there was no further decline,” the NFIB’s economist said. “Washington remains a mess, and the basic message is that there is no second-half surge in the wings waiting to take center stage.” Confidence is still stuck below pre-recession highs. Shouldn’t we, like the stock market, have surpassed that by now?

Were we too optimistic?

A new study from Aflac released this morning found that although 18 percent of small-business owners expected to eliminate or delay raises in 2014, a whopping 28 percent actually did so. Not only that, but so far in 2015, 23 percent cut back on their hiring plans (only 16 percent thought they would last year), 18 percent had layoffs, and 16 percent reduced hours from full to part time–all of these steps were significantly bigger than had been anticipated at the end of last year. The good news from the Aflac report is that health care and benefits costs were not cut as much as others, reflecting employers’ desire to maintain and keep their existing work forces happy as labor becomes more scarce. The bad news is that business owners are cutting back more than they thought they would only a few months ago.

What happened to our confidence? Why are small-business owners spending less this year than we expected? The economy isn’t so bad. There’s plenty of capital available, and businesses are borrowing. Interest and inflation are at near-historic lows. What’s going on? From the frontlines, there’s this reason: Our sales and profits are mirroring the overall economy. Things are not as good as we hoped.

The post-recession recovery has been disappointing.

As reported in this recent Wall Street Journal article: “From 2011 through 2014, the economy grew at a paltry annual rate of 2 percent, down from the previous estimate of 2.3 percent. This means the overall U.S. economy is smaller–with GDP slashed by $105 billion in 2013 and $71 billion in 2014 to $17.35 trillion. From 2011 through 2014, the average annual growth of real disposable personal income was slashed to 1.5 percent from 1.8 percent. That’s a giant cut in the standard of living. Since the recession ended in June 2009, the economy has grown at an annual rate of about 2.1 percent. That’s 0.6 percentage points worse than even during the much-maligned George W. Bush expansion. Growth averaged more than 3 percent from 2003 to 2006, but the best growth during the Obama years has been 2.5 percent in 2010, and in both 2011 and 2013 it nearly slipped back into recession.”

Does this sound familiar to a small-business owner? Of course it does. We are not going backwards. It’s just that we’re not moving forward as fast as we expected. My company’s revenue this year has grown, but only by a few percentage points. Energy prices, thank God, have stayed low. But all of our other costs, from services to benefits to health care to the price of a new laptop, have continued to rise. We’re busier than we were a few years ago, but the costs just to stay current with demand continue to keep our profits low.

Regulations and taxes are giving us pause and holding back growth.

There’s an overall trend to push minimum wages higher. New overtime rules means we will be paying more. Governments are pushing employers to offer paid time off. Unions can now organize faster under recent National Labor Relations Board rules. There is growing scrutiny on the categorization of independent contractors that may impact how we outsource work. And, oh yeah, there’s a continued threat of higher health care costs. There are legitimate reasons for these regulations. But they also come at a cost. And small-business owners are looking ahead with concern, and seeing more pressure on their profits.

But there’s one other big thing that’s really starting to hit home. That’s taxes. Back in 2013, we saw individual rates rise and additional taxes for unearned income and Medicare. Personal exemptions were phased out, and itemized deductions were phased down. Capital gains taxes increased. Future deductions for accelerated depreciation and tax credits for research and development still remain up in the air. Many of these deductions are aimed at those making more than $300,000 per year. And many dual-income, middle-class families made up of both wage earners and business owners that I know do reach that number, and then get penalized. And there’s another thing: the rise in local, state, real estate, and school taxes that many of us have seen over the past few years as our states seek to pull themselves out of their prior deficits and fund impossibly large pension and entitlement obligations. Here’s what I pay in Philadelphia.

I don’t know any small-business owner who’s outright complaining. We’re grateful that things are going OK and we’ve clawed our way back from the recession. But we were hoping for more in 2015. And that hasn’t happened yet.

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