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It’s no secret that small businesses have been struggling lately.
Yet the tiniest firms are facing even bigger challenges, and that could be an early warning signal for the economy.
Revenue for 30,500 sole proprietorships and other enterprises with just a few employees fell 3.4% in the first quarter from the same period a year ago, according to Invoice2go, which sells an app that generates invoices for small businesses. The downturn follows a slowdown from revenue growth of 14% in 2017 to about 3% last year.
“I think it’s showing that small service businesses are seeing a (pullback) in demand that’s indicative of a cooling economy and could be a leading indicator of recession,” says Invoice2go CEO Greg Waldorf, the former chief executive of eHarmony.
The data, provided exclusively to USA Today, offers a rare window into how very small enterprises across the country are doing because it tracks their actual sales, rather than responses to a survey.
About 60% of Invoice2go’s customers are self-employed service businesses while another 11% have one employee and 25% have two to five employees. Many are plumbers, landscapers and other contractors, though the company also serves technology, transportation, recreation, food, education and other service firms. Sales fell in nine of the 12 industries tracked last quarter, with just event services, outdoor services and technology posting increases.
Firms with fewer than 20 workers make up about 98% of U.S. businesses, according to the Small Business and Entrepreneurship Council.
Entire Productions, which stages corporate and other events, is feeling the pinch. Sales for the San Francisco-based company dipped in the first quarter after surging 28% last year as the number of events it produced from January through mid April slipped to 137 from 156 a year ago, says CEO Natasha Miller.
“I do see that something is changing,” Miller says. She says her corporate clients’ cash flow is stable but she believes they’re preparing for a possible downturn. Miller says she had planned to hire an account executive and social coordinator to her staff of 14 but, “Now, I’m just going to hold tight.”
Other measures of the health of small businesses and the economy also have highlighted a slowdown in recent months, albeit a less dramatic one than what the Invoice2go data indicates.
The most closely watched survey of small firms, out last week, shows 27% said sales were lower the past three months, up from an average 19% in the second half of 2018, according to the National Federation of Independent Business. About 6% of the firms NFIB surveys are sole proprietorships, while about 60% have fewer than 10 employees.
Meanwhile, the largest U.S. corporations that make up the Standard & Poor’s 500 index are expected to report revenue gains of 4.8% in the first quarter compared to the year-ago period, down from about 9% last year, according to FactSet. Earnings are expected to slide about 4%.
And the U.S. economy is expected to grow at an annual rate of 1.5% in the first quarter, down from 2.2% late last year and 2.9% for all of 2018, according to a survey of 49 economists by Wolters Kluwer Blue Chip Economic Indicators.
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The economy and business sales were weak in the first quarter largely because of the 35-day partial government shutdown, says Wells Fargo economist Mark Vitner. Also, he notes, tax refunds have been lower than in prior years because of the new tax law, crimping consumer spending. And February snowstorms hurt weather-sensitive sectors such as construction, restaurants and retail.
Like many economists, Vitner expects a pickup in the economy the rest of the year but a pullback from 2018. Two-thirds of chief financial officers predict a recession by the third quarter of 2020, according to the latest Duke University/CFO Magazine outlook released Wednesday.
Invoice2go’s Waldorf believes his small-business customers’ first-quarter revenue drop reflects a potential economic slump that goes beyond the government shutdown and weather effects, noting their sales gains decelerated in 2018. His clients, he says, are among the most vulnerable firms and are likely the first to feel a shift in the economy.
“Sole proprietorships probably do feel the squeeze a little bit sooner than other companies that can make a lot of adjustments,” Vitner says.
The Falcon Lab, a marketing and printing firm based in McLean, Virginia, has seen sales increase 5% so far this year, down from 15% to 20% advances the past few years, says CEO Borzou Azabdaftari. He doesn’t blame the government shutdown, adding that sales at his 10-employee company were strong in January — when the bulk of the shutdown occurred — before cooling.
Azabdaftari is holding off on two planned hires and the purchase of $50,000 to $100,000 in new production equipment.
“We’re watching people’s spending patterns and we’re getting nervous,” he says.
According to OnePoll, worrying about work could take an even bigger toll on the business and the owner. The study was conducted on behalf of Alarm.com.
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