Small businesses with fewer than 50 employees and new start-up ventures are responsible for the overwhelming majority of jobs currently created in the economy. However, those businesses will be hit hardest if the economy goes over the fiscal cliff.
Increasingly, the question is not “whether” the US economy descends the fiscal cliff, but what will happen once there. The stubborn Congressmen, who signed a no tax pledge, and the President seem unlikely to strike up a meaningful deal in the few days remaining this year.
Despite the Presidential electoral mandate that endorsed the tax and spending proposals of the President, hardline Republican opponents seem committed to proving the election outcome was a fluke, caused by the failure of the party to rigidly adhere to a no tax, deep spending cut pledge.
This hard right strategy, already rebuffed by the majority of the population in November, will no doubt push the country over the fiscal cliff. As we hit the cliff, the small business segment will be punished most and here is why:
1. Small business sales are heavily dependent upon retail spending and rescinding the payroll tax cut will push monthly tax deductions from workers’ checks back up to 7.2% from its current rate of 5.2%. This means consumers will have less money to spend on retail items.
2. The fiscal cliff will also terminate emergency unemployment compensation benefits. This will mean less retail spending. As a result, the latest data indicates that consumers have started saving more, spending less and are less optimistic about the future than they are about the present. This is bad news for small business retailers.
3. The automatic spending cuts accompanying the fiscal cliff will not just ripple through social programs, but also through small business contracting. Currently, the federal government has a 27% small business utilization target for large corporations that receive government contracts. The target must be met by corporations identifying subcontracting opportunities for small businesses. The cutbacks in government spending will reduce opportunities for small businesses significantly.
4. Small and minority businesses will be hurt doubly because a majority of the spending cuts are aimed at the Department of Defense and DOD accounts for over 50% of small and minority business contracting opportunities with the government.
5. Minority businesses will be hurt more deeply because successful companies owned by Blacks and Latinos are much more heavily dependent upon government contracting than are non-minority owned small businesses. For example, while minority businesses represent 21% of the nation’s 27 million small businesses, they comprise 39% of the federal government small business contractors.
6. Among all areas of the economy, business fixed investment has suffered most due to the uncertainty surrounding the inability to reach a deal on the fiscal cliff. When corporations stop investing, they need fewer small business suppliers. During the second quarter of 2012, fixed investment increased 3.6%. However, last quarter it declined by -1.8%. The decline is a reflection of the unwillingness of corporation to invest until they understand the rules of the game under which they must operate.
If you want to know where the fiscal cliff will hit hardest and most immediately, just keep your eyes on the small business sectors and the gradual reduction in jobs they have been creating so impressively over the last several months.