America’s small businesses remain pessimistic about the economy, but the problems they’re facing have changed over the past year.
For most of the aftermath of the financial crisis, a plurality of small business owners surveyed by the National Federation of Independent Business said the biggest problem facing their companies was poor sales.
In recent months’ NFIB surveys, however, poor sales have been overtaken by two other concerns: taxes and government regulation.
In the NFIB's monthly Small Business Economic Trends survey released Tuesday morning, 17 percent of the respondents identified poor sales as the top problem facing their business, down from 22 percent a year ago and from highs in the early 30s in 2009-2010. Twenty-one percent, on the other hand, cited government regulations and red tape, and 20 percent taxes.
Poor sales haven’t been the top problem for a plurality of small businesses since October of last year, according to the NFIB. Nevertheless, demand is still significantly lower than it was in 2007, before the recession.
The decline of “poor sales” among the rankings of problems facing small businesses could be indicative of a larger change in the U.S. macroeconomy.
Economists have looked to business owners’ worries about low sales in the NFIB for primary evidence of a tricky concept in economics, namely a shortfall in aggregate demand. The idea is that the economy is performing below potential because total spending on goods and services is too low, not because supply of goods and services is constrained.
For example, the economists Atif Mian and Amir Sufi noted in a paper for the Federal Reserve Bank of San Francisco in February that low unemployment at the state level was correlated with businesses in a given state reporting low sales -- a fact the authors took as evidence that aggregate demand is “important” for explaining ongoing joblessness.
Whether or not an aggregate demand shortfall is causing the high level of unemployment is a key question for setting economic policy. If low aggregate demand is holding back growth, then the government, in theory, can boost it with stimulus, either through fiscal or monetary policy, and thereby bring economic output back up to its potential. If instead unemployment is the product of supply-side factors, such as high taxes or counterproductive regulations holding back growth, stimulus won’t work.
Janet Yellen, President Obama's nominee for Fed chairman and the current Fed vice chair, said in one of her last public speeches in February that distinguishing between unemployment caused by a shortfall of aggregate demand and unemployment caused by structural factors is crucial for monetary policy.
“If the current, elevated rate of unemployment is largely cyclical, then the straightforward solution is to take action to raise aggregate demand,” she said. “If unemployment is instead substantially structural, some worry that attempts to raise aggregate demand will have little effect on unemployment and serve only to stoke inflation.”
In that speech, and elsewhere, Yellen concluded that the problem is cyclical. Current Fed Chairman Ben Bernanke, too, has consistently said over the past few years that most of the unemployment problem is the product of depressed spending rather than structural problems.
Other indicators of aggregate demand are not showing the diminishing of the shortfall that the NFIB survey measure is. Neither overall consumer spending (in blue) or gross domestic product (in red) has returned to pre-crisis trend:
And professional forecasters surveyed by the Philadelphia Fed continue to have slightly depressed expectations for nominal gross domestic product growth:
So while small business owners are reporting a shift in the problems facing their firms, the outlook isn't likely to change for monetary officials anytime soon.