How Small Businesses Are Dealing With the Global Uncertainty

In any other environment, you’d think business owners would be out celebrating, popping champagne and swinging for the fences. Only they’re not. While optimism about their business prospects has recovered since the financial crisis, they seem to be holding their collective breaths, waiting for the other shoe to drop.

In this case, the other shoe is the rest of the world, which is grappling with the United Kingdom’s decision to leave the European Union, a potential economic crisis in Italy, and a dramatic slowdown in China, on top of other events.

The troubled global environment has created something of a tale of two economies for U.S. businesses. Many business owners are able to motor onward, secure in the $17 trillion U.S. economy, the largest in the world, and the local markets they’ve developed that are their mainstay. Yet others are exposed to the vicissitudes of the dollar, weak commodity prices and the sense of gloom enveloping global trading partners. If not directly, they are caught up in the supply chains of much larger companies that are affected.

“This is not an impressive economy,” says Drew Greenblatt, president and owner of Marlin Steel, a manufacturer based on Baltimore. “The U.S. economy is the tallest dwarf.”

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Greenblatt feels the effects of the volatility directly. His 33-person company, which produces steel baskets that manufacturers in a variety of industries use to carry components along conveyor belts, owes roughly a quarter of its $6 million in sales to overseas customers. Another 50% of his sales are to big Fortune 500 companies such as Caterpillar, Johnson & Johnson, and Merck, which also depend on exports.

As global economies have contracted, the dollar in the past two years has experienced its biggest appreciation in 20 years, of roughly 20%, according to the National Association of Manufacturers (NAM). For overseas customers, it’s like being handed an equivalent percent price increase in the past year, Greenblatt says. Similarly, his large customers are hesitant, waiting to place orders with him, until they have a better sense of how much their own overseas customers plan to buy.

The uncertain environment has meant Greenblatt’s revenues are all over the map. In 2015, for example, revenues declined 10% to $4.9 million. This year, sales will grow by 22%, Greenblatt says, driven by a ramp up in sales to automobile and pharmaceutical companies.

As a small manufacturer, he’s not alone in that sentiment: small manufacturers, in contrast to their larger peers, were the sole group whose positive outlook decreased in the second quarter, according to NAM’s most recent quarterly outlook survey.

“Small manufacturers are canaries in the coal mine,” Greenblatt says. “People are not optimistic and enthusiastic about the future; they are wary.”

Certainly you can take your pick from gathering storm clouds on the horizon outside the U.S. Both the World Bank and International Monetary Fund have cut their global forecasts for growth by a quarter of a percentage point to between 2.4% and 3.1%, respectively, for 2016.

Brexit, the referendum that led the U.K. to sever its ties with the European Union after 40 years, rattled markets, sending the pound sterling down to its lowest level in a generation. In a flight to safety, investors have piled into U.S. Treasuries, sending bond yields down to historic lows.

Economies in the Eurozone have pushed their interest rates into negative territory, hoping to stimulate economic growth, following a similar move by Japan in early 2016. And Italy’s banking system, by some estimates, is on the brink of insolvency. That is likely to cause further havoc for the Eurozone which is still struggling with the Greek debt crisis, which peaked last year when that country failed to make its debt payment to the IMF.

Things are scarcely better in the rest of the globe. China, the world’s second largest economy, has seen its growth rate roughly halved to 6.6% in the past year. That slowdown in turn has helped set off the rout in commodities markets, sending oil to an all-time low.

As the relentless drum roll of unsettling economic news goes on and on, most economists have trimmed their forecasts for U.S growth to 1.8% for 2016, from an already weak 2%.

Yet, according to Kevin Logan, chief U.S. economist for HSBC, most U.S. small businesses have been insulated from the world turmoil because the majority do not export, and nearly 85 percent of the U.S. economy is in services. And much of the service sector has benefited from low oil prices, continuing low interest rates that make borrowing relatively cheap, and increasing consumer willingness to open their wallets.

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One such company is the startup Combatant Gentleman, an e-retailer based in Orange County, California, that sells suits and accessories to professional millennial males gearing up for their first jobs. As the economy has recovered, and more younger workers have found jobs, Combatant Gentleman, which has 27 employees, has benefited from the upsurge.

“The demand is there for the product,” says Vishaal Melwani, the company’s founder and chief executive, who says the Combatant Gentleman’s revenue of $10 million for 2015 is set to double in 2016.

However, Melwani, who manufactures his products using Italian wool, says there are potential headwinds. As Italy deals with its own looming financial emergency, driven by a banking crisis involving billions of dollars worth of bad consumer debt, his wool producers have begun pricing their product in dollars, which has driven up the cost of his raw material. That, in turn, will force him to increase customer prices by up to 22% in the coming year, he says.

While small retailers are eking out growth, there are troubling signs in sectors considered leading indicators, such as temporary hiring.

Temp hiring is usually a bellwether during recoveries, HSBC’s Logan says, as employers tend to staff up as they grab more business: they can use temporary workers without taking on the burden of actually hiring new employees. Unfortunately, temporary staff hiring has trailed off to a whisper, increasing a scant 0.6% to 2.9 million workers from June 2015 to June 2016. The 12 months before, hiring had jumped 5%.

“Temporary employment has stopped growing,” Logan says, suggesting the economic expansion which has sustained itself for close to six years, is coming to an end.

Even so, some small temporary staffing companies don’t seem to have gotten that memo–at least not yet.

For example, Green Group, of Charlotte, North Carolina, provides workers in light manufacturing, warehouse distribution and trucking. Todd Warner, the company’s chief operating officer, is upbeat about the prospects for his company, noting that sales for his $63 million revenue company grew 55% in 2015, while the average contract for his drivers has nearly doubled to 11 months since 2015.

Greengroup has also found a new and growing niche using its workforce to provide so-called last–mile logistics for warehouses that need deliveries to consumers doors, as e-commerce has taken off in recent years. Such work now represents 20% of Green Group’s sales in 2015. That work did not exist in 2014, Warner says.

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Nevertheless his business customers don’t seem to be pulling the trigger and moving temporary drivers to full-time positions. He estimates that about 10% of his drivers will end up in full-time positions in 2016, compared to 55% who found permanent jobs in 2015.

“We are a barometer of what is happening in the economy,” Warner says. “And people are not hiring [full-time] because of uncertainty.”

Drew Nordlicht, managing director at wealth advisory Hightower Advisors, whose clientele includes high net worth entrepreneurs, says there are troubling signs in the U.S. that will continue to bear watching. Among those is the earnings recession across the S&P 500, which has gone on for more than a year. The index’s companies are carrying record levels of debt, which they have used to buy back shares over the past year, to financially engineer hire share prices. That’s bad news for any company in the supply chain of such companies, Nordlicht says.

But the majority of small businesses serve much more local markets, and for these it’s still possible to grow, even in an economy set to expand at just shy of 2%.

“The environment is still supportive of small business,” Nordlicht says. “I expect small business to do better than the large companies in the S&P 500 and Fortune 500.”