Workforce, inflation and supply chains are top challenges for small businesses in 2022

The 2022 economic outlook for small businesses likely will look a lot like the end of 2021. Employee recruitment and retention, inflation and supply chain disruption continue to rank as the top concerns.

“Small businesses feel every bump in the road of the economy, so it’s worth trying to understand what’s driving the economy at this time,” said Nela Richardson, chief economist at ADP.

Richardson shared the results of the company’s latest Small Business @ Work survey in a January 25 webinar, looking first at the overall economy and then how it affects small businesses. The survey provided an economic snapshot in several key areas:

Jobs. “We are all familiar with what seems to be a counterintuitive part of the economic recovery, which is the record amount of labor shortages,” Richardson said. “By our estimates, the national labor force is down by about 3.6 million jobs from where it was before the pandemic. We believe those labor shortages will continue in 2022 but will be less acute as fewer barriers will keep workers out.”

Wages. Although wages are up, so too is inflation. “Wages accelerated by about 4.4% in the fourth quarter compared to the year earlier,” she said, “but the takeaway is that real wages will continue to rise but be below inflation.”

Economic growth. “Growth this year should be fairly moderate but stronger than pre-pandemic rates,” Richardson said. “We are not going to see that boost in growth to 5% or 6%, but we are going to see solid growth.”

Industry. Retailers will continue to face headwinds that began before the pandemic as shoppers shift from in-store to online purchases. “Many small businesses adapted to it well and grew their businesses through the pandemic,” she said. “There also will be increases in contract work and self-employment.”

The bottom line is that although the economy continues to grow, the rate of growth is slowing. “New forecasts for economic growth are weaker than in August,” Richardson said. “We have seen some deceleration, and it is due mainly to supply shortages. That is going to go directly to some of the challenges that small firms are facing. By 2023, professional forecasters believe growth will hit about 2.3%, which is about where we were during 10 years of expansion that preceded the pandemic.”

Two dark economic clouds are likely to hover over small businesses in the coming year.

“The big concern in 2022 is inflation,” she said. “Because of supply shortages and input constraints due to the pandemic, we have seen a real rise in inflation. It hit a high we haven’t seen since 1982. It means that even though we have seen wage growth of about 4% in the last quarter, that growth is not keeping up with inflation. On average, real wages for workers are declining, not increasing.”

Twenty-six percent of firms said supply chain disruptions are a challenge, compared with 21% the previous quarter. “We usually think of big companies when it come to the global supply chain, but supply chains are global for all sizes of firms,” she said.

Richardson offered four takeaways from the survey:

Employee retention. “The top concern for small businesses remains consistent. Finding qualified challenges overwhelmingly is the No. 1 challenge facing small businesses. Thirty-nine percent said it was a big challenge, compared to 36% the previous quarter. That challenge increases dramatically, as you would expect, with company size.“

Wages. “Virtually no employers plan to decrease wages in the next six months, but a number of firms are planning to increase wages. This is an important trend to watch.”

Employee work location. “For most employees, working onsite is still the norm. We have seen some stabilization in remote work trends. Four of five companies with remote employees feel they are managing remote employees well and believe they are doing a good job of keeping them engaged.”

Prices and revenues. “Fifty percent of firms have had to raise the prices they charge their clients in the last six months. Nearly two in five saw revenue increases in the fourth quarter. So there is good news here in terms of sales, although not-so-good news for customers in terms of prices.”

Richardson expects small businesses that have successfully weathered the pandemic so far to continue to find ways to meet new challenges.

“We have seen some progress over the course of the year,” she said. “Small businesses have been resilient in the face of tremendous uncertainty. But they have turned a corner in terms of priorities. It’s about hiring, it’s about growing their businesses and it’s about increasing their profitability.“