Recent Economic Developments in 2018
The private sector’s tax cut: You may have heard that many businesses are getting tax breaks. The reality is that mostly C-Corporations are getting a tax cut from 35% of their net income down to 20%. While this may seem like a huge cut, most C-Corporations still pay taxes twice: once when the company makes money at 20%; and then again when income is distributed to share holders. Still, this is quite a cut. This means that companies are more incentivized to make a profit in the U.S.
The dropping unemployment rate: The national unemployment rate was at a record 4.1% for the fourth month in a row. Economists believe we are at full employment when the unemployment rate is at 5%. Before you get the impression that unemployment is super-low; I want to throw out a more important statistic in our labor market that is rarely reported. This more important statistic is called the Civilian Employment Population Ratio (EMRATIO) as reported by the Federal Reserve Economic Data (FRED). This statistic is a percentage of employable civilians that are working. In April 2000, the EMRATIO was 65%. This means that 65% of the employable civilian population was working seventeen years ago, when our economy was humming. The EMRATIO bottomed out in July of 2011 at 58%, during our recent recession. Since that time, it has climbed back to 60%. While this is an impressive uptrend, we are still 5% lower than our peak in 2000. This means that we effectively have a 9% national unemployment rate based on the 2000 data as a norm.
Interest rates: Interest rates remain relatively low. A 30-year fixed home mortgage has been as low as 3.4% and as high as 4.3% on average in the recent two years. Although there is a slight uptick in 2018, it is nothing that would signal that home mortgage rates will continue to rise. While home mortgage rates are low, savings rates are even lower. If you want to put your money is a safe savings account, you will earn between 0.5% for short term savings up to 2.3% for a 10-year treasury bond.
Government spending on the rise. While President Trump promised to eliminate our $19-Trillion national debt within 8-years, it looks like we are going in the opposite direction. Republicans have negotiated dramatic increases in military spending while Democrats have negotiated additional spending in domestic spending resulting in an increase in national debt and deficit spending. The key is that government spending will increase quite a bit in 2018; and will most likely continue to increase in future years. This increased spending will create an even tighter labor market and create greater inflation.
You may wonder why a business coach is interested in macro economics. Especially, a person who coaches small business owners. I’m convinced I cannot control how our government or general economy fairs. However, I can prepare business owners for what is about to transpire. All of the four factors I described above will most certainly contribute to inflation. How much inflation? I have no idea. If you are a business owner, I’d like to give you some tips on how you can best manage our upcoming inflationary environment.
What Should You Be Doing in an Inflationary Environment?
Raise Your Prices
Prices are a product of your costs and the perceived value by your customers. Most small business owners will check the pricing of their competition and then set their prices relative to their competition. In an inflationary environment, you will most likely be checking your competition’s current price which is probably already out of date; and too low. If you are increasing labor rates because of inflationary pressure, you will need to increase your prices to customers the same percentage. In addition to increasing labor rates, you will most likely be paying higher rates for materials.
Look for Opportunities to Increase Productivity
As labor and material prices rise, automation and other productivity improvements tend to make more sense. Rather than simply hiring more people, look at ways to streamline whatever it is that you do. Create online services and automated systems wherever you can.
Hold on to Quality Employees
As the labor market tightens, your employees, whether skilled or not, will be pulled by competing priorities. Many of these competing priorities will be other employment opportunities… possibly with your competition. Other priorities will be to stay at home with their children. After all, in an inflationary environment, child-care is also increasing in price; and their job may no longer be justified to pay this high cost and also sacrifice time away from their kids. The way to retain employees is not only with money. Regardless of whether inflation exists or not, you need to treat your employees with respect and give them sufficient latitude for personal requests. You still keep reasonable boundaries at work; but it does mean that you treat your employees how you would want to be treated. You will also need to pay your employees a competitive wage with competitive benefits.
One of the provisions that was passed as part of the recent tax bill (Dec. 2017) was the elimination of the “individual mandate” associated with the Affordable Care Act. While this doesn’t affect employers with more than 50-employees; it does impact employers with less than 50-employees who want to provide group healthcare benefits to their employees. Primarily, this change in the law means that you can provide non-ACA-compliant plans as an option to keep your employees with a lower premium cost.
Don’t Skimp on YOU
While employees may be demanding higher wages; you need to be fair in paying yourself; whether through equity draws or salary; your compensation should rise with the rising cost of inflation. There’s no reason, you and your family need to go without in a hot economy.
Be Deliberate and Intentional
No matter what you do in this environment, don’t act out of fear. Look at your business plan and create a plan that allows for higher price increases with labor and material costs than you have had in recent years. Don’t go overboard. Make sure that your cost increases are reasonable and fair to your customers. If you provide a subscription service, try to give your customers sufficient notice to fit your price increases into their family or business budget.
Customers are AWESOME, but Not Good Price Advisors
While I encourage you to remain in close contact with your customers, I believe that customers are the wrong people to advise you on your pricing. The reason for this is simple. Our free-market is set up for consumers to request the lowest possible price; and business owners to charge the highest possible price, given their product quality. In an inflationary environment, you will automatically pay higher prices for labor and materials. If you fail to increase your prices, you will simply lose profit until you come to your senses. It’s a great idea to inform customers about price increases and listen to their concerns; but you need to make a decision that is best for the long-term interest of your company and its employees.
Don’t Delay on Major Purchases
If you need to buy equipment and you know you will need it, pull the trigger sooner than later. If interest rates are rising, you will not get a great deal by waiting to borrow money. With the cost of equipment rising, you will not get a better deal than the deal you will get right now. Don’t spend money you don’t need to spend; but don’t delay on purchases you know you will make.
Know Your Local Economy
While the statistics I quoted above are national statistics, your local economy may be quite a bit different. If your business relies on the local economy, you need to be aware of how things are going in your part of the country. Local house prices are usually a good indicator for local economies. If home prices are rising, and builders are building new homes, your economy is probably on the upswing. Pay attention to local news and unemployment figures. While the nation has an unemployment rate at 4.1%; here in Colorado we are experiencing an unemployment rate of 3.1%. Most of my business owner clients in Colorado are having great difficulty filling open positions at this very low rate.
What if I’m Wrong?
While I am relatively confident that inflation is coming; I certainly don’t know to what degree. Even with this confidence, I may be wrong. If you decide to give your employees raises, automate, or increase your prices; and customers are not willing to pay your higher prices; your business will be negatively impacted. Likewise, if you fail to increase prices, hold labor wages artificially low and skimp on higher cost materials… you will lose quality sensitive customers and talented employees. Ultimately, following my counsel is your choice. I will share with you that four of my clients raised prices in 2017 and saw no reduction in customers; and an upswing in their profitability. I wish you the best in whatever you decide.
As a business coach, I help my business owner clients change their mindset in a way that allows them the freedom and profitability they have always hoped for, but never thought possible. I write weekly blog posts just like this one; and am developing a robust online training system for business owners. If you want to stay up to date with all of the cool stuff that is going on at Jeff Schuster Business Coaching and receive two awesome business coaching tools, sign up here.
Note from the Author
My name is Jeff Schuster. I am a certified Life and Business Coach serving small business owners, corporate executives and others who want to transition from “expert” to “entrepreneur”. I have been a small business owner for most of my 30-years in the workplace. I grew an energy efficiency and renewable energy engineering and construction company from nothing to over $10-million/year and sold it in 2013. I now help other business owners make amazing progress toward their own dreams of business ownership independence and success.