By most measures of performance, the American economy has been bustling during 2018. The Dow Jones Industrial Average reached its highest ever closing of 26,828.39 on October 3. The NASDAQ rose above 8,000 in September. Unemployment is at its lowest level in a half-century.
However, recent developments may frighten small business owners in the fourth quarter. President Trump is ratcheting up his rhetoric against China and threatening a more tariffs, and interest continue to rise. These developments have caused some recent stock market jitters, and recent acts of violence, such as the shootings in Pittsburgh and the mail bombs sent to Trump critics, do little to reassure nervous investors.
While we are still in a strong economy, there are certainly some developments that are frightening small business owners as we approach Halloween. A looming trade war with China, the diminishing impact of tax cuts, and rising interest rates are causes of concern in the fourth quarter of 2018.
Trade Wars
When two countries start a trade war, the cost of goods coming into the country naturally rises because of higher tariffs imposed on them. Small businesses that need materials and inventory from domestic sources will fair best during a trade war because higher tariffs won’t directly impact them. However, companies that rely on inventory from abroad, such as specialty retailers that sell imported goods, will encounter challenges. When the cost of goods sold rises, you have to raise your prices in order to maintain the same level of profitability or you can keep prices the same out of fear that higher prices will hurt sales. If the latter is the case, profitability will naturally decline.
Companies involved in exporting will also suffer. The cost of American-made goods rises in international markets when other countries inflict higher tariffs in response to U.S. actions. Small businesses that rely on exports for significant percentages of their revenue are impacted the most during a trade war. This requires small business owners to examine their operations and look for ways to cut costs.
“At a 10 percent tariff, you can absorb the cost, but 25 percent is too much,” said Nayan Dalal, president and CEO of Trade Lines, Inc., one of the top private label home textile manufacturers and importers in the United States.
“With the higher costs due to the tariffs, unfortunately the consumer will have to pay for it. Margins are tight in this industry,” added Mr. Dalal, whose company has headquarters in South Plainfield, NJ, and in Mumbai.
Waning Impact of the Trump Tax Cuts
President Trump’s tax cuts helped kick-start an economic boom. As the corporate tax rate went down, companies took the opportunity to take the savings and reinvest in their growth. However, the boost from the tax cuts will likely be a short-term phenomenon, especially if the national debt continues to grow. If that happens, look for taxes to rise again at some point in the future to make up for the growing budget gap.
The prospect of rising taxes always puts fear into the hearts of small business owners. The probability of tax increases while Trump is in the White House and the Republicans control a majority in the House and Senate.
Rising Interest Rates
Interest rates have increased slightly, but continuously, during the past year, and indications from the Federal Reserve are that the central bank will continue along this path in order to maintain its two percent inflation goal. While higher rates encourage banks to lend, a consequence is the higher cost of capital for borrowers. For a long stretch, interest rates were near zero, a strategy that helped mitigate the post-recession credit crunch. But rates could not stay that low forever.
Fed Chairman Jerome Powell has signaled that we can expect yet another interest rate hike at the end of the year, and more ahead in 2019. This policy led to a recent clash with President Trump, who fears rising rates may put a curb on economic growth.
For small business owners, the fear is that the cost of capital might go high enough to make small business borrowing prohibitive. While I do not see this being a problem in the near future, it make become an issue in the longer term if interest rates continue to climb.
