A JPMorgan economist explains why small and midsized businesses are feeling optimistic

1320693767696JPMJim Glassman

Following the recession, small and midsized businesses in America faced a slow and uncertain recovery.

Confidence tumbled during the recession and remained low for years afterward; in early 2016, eight years into the recovery, business owners were still considerably more pessimistic than they had been at virtually any point in the previous 30 years.

Over the past year, however, business optimism has skyrocketed. Multiple surveys — including JPMorgan Chase’s 2017 Business Leaders Outlook — confirmed that the nation’s small and midsized businesses expect the economy to improve over the coming year. Indeed, for the first time since the recession, the majority of businesses are planning to expand their workforces and make new capital investments — and since small firms make up a disproportionate share of new hiring activity, this small business revival will likely result in good news for job seekers.

Why So Sunny?

The surge in business optimism is largely driven by the growing strength of the American economy. The recovery has created 16 million jobs, pushing the labour market back toward full employment, and low debt burdens have freed up discretionary income for American households, spurring a boom in consumer spending. As the underwater mortgage problem has faded from view, home prices have stabilised and new construction is finally picking up. Real GDP per capita recently surpassed its prerecession peak, and the economy’s strength is providing a solid foundation for businesses to expand.

Stabilizing energy prices are also helping businesses grow. The global oil glut halted drilling activity in many of America’s shale fields; many projects became unprofitable when oil fell to $US30 per barrel. Now that oil has found its footing, capital investment is recovering and the outlook is brightening for the small contractors that provide oil field services.

Businesses are also optimistic about the shifting political landscape. They are often challenged by complex regulations and tax provisions, and the rising cost of health insurance has become a new source of financial uncertainty. However, many business owners are hoping that the new Trump administration will be able to reform regulations, cut taxes and control healthcare costs — in fact 76 per cent of business leaders surveyed in this year’s Business Leaders Outlook expect that the new administration will have a positive impact on their businesses.

The Employment Upshot

Because of the cyclical and often seasonal nature of their work, small businesses make up a disproportionate amount of hiring activity. Unlike larger companies, which sell to a stable international customer base, small businesses are more likely to need to add workers to fulfil a new contract or keep pace with a growing local economy. Conversely, during downturns, they are more likely to undergo layoffs, as they lack the financial cushion to retain workers through periods of weak demand.

During the recession, small businesses suffered drastic workforce cuts, laying off an average of more than 1 million employees every month during the worst of the downturn. Now that demand has recovered, the smallest businesses are creating the bulk of the nation’s new jobs; according to the US Department of Labour, businesses with fewer than 50 employees added an average of 75,000 to 100,000 new workers every month in the past year, creating almost 20 times more jobs than the nation’s largest companies did during that same time.

As small and midsized businesses continue to expand, hiring activity should accelerate, too. Currently, 5.5 million job openings are unfilled, and according to this year’s Business Leaders Outlook, 38 per cent of midsized businesses are extremely or very concerned about the limited supply of candidates with the right skill sets. As the economy nears the top of the business cycle and more jobs are created, workers should enjoy rising wages and new incentives for training and professional development. Growing optimism in the business community will soon benefit workers everywhere.

View our economic commentary disclaimer.

As Managing Director and Head Economist for Commercial Banking, Jim Glassman provides market insights to help clients better understand the changing economy and its impact on their businesses.

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