SMB confidence drops, but non-compete ban expected to have minimal impact

Optimism among small businesses declined in May from its peak earlier this year, the latest WSJ/Vistage Small Business CEO Confidence Index found.

“The improving economic optimism among small businesses at the start of the year has waned, with the latest month-over-month declines coming from economic sentiment,” said Anne Petrik, vice president of research for Vistage. “Inflation, supply chain, unchanging interest rates and new tariffs on China all are part of the financial equation that makes growing forward a challenge for small businesses,”

The index is calculated from responses to a set of six questions about the current and future state of the U.S. economy; revenue and profitability projections’ and hiring and investment plans. Measured over time, the index reflects trends in the U.S. economy. Among the May highlights:

• Current economy. Nineteen percent of CEOs believe the economy has improved compared to last year, and 34% believe it has worsened.
• Future economy. Twenty-one percent of small-business leaders expect the economy to improve in the next year, while 27% expect it to worsen.
• Revenue projections. Fifty-eight percent of CEOs expect increased revenues in the next 12 months, while 15% expect decreased revenues.
• Profitability projections. Less than half of small businesses expect increased profits in the next 12 months, while 20% expect profits to decline.
• Fixed investment plans. One-third of small businesses plan to increase investments, while a growing proportion (15%) plans to reduce spending in the next 12 months.
• Workforce expansion plans. Fewer than half of small businesses plan to expand their workforce in the next 12 months, and just 8% report an expected decrease.

One factor not affecting CEO confidence is the vote by the Federal Trade Commission to ban non-compete clauses in employment contracts. Ahead of this rule taking effect on September 4, small businesses shared their thoughts on its impact:

• Just 2 in 10 said the ban will affect them, while more than 40% said it will not.
• Nearly 6 in 10 do not use noncompete agreements.
• Only 20% require all employees to sign a noncompete agreement.
• About a quarter require some employees (mostly senior leaders) to sign.
• Just 15% of CEOs of small businesses reported they have signed a noncompete.

Related: Challenges to noncompete ban already hitting courts

Petrik expects the sentiments expressed in the survey to affect small-business decision making, especially in the area of hiring.

“With projections that the Federal Reserve will not lower interest rates until later into the year, small businesses need to consider the opportunity cost of waiting for lower rates or investing now,” she said. “The burden of increased labor costs impacts small businesses across the board; 59% of small businesses report that this is the biggest inflationary cost. This, in turn, may be the reason small businesses are holding off on workforce expansion, as just 48% are planning to expand their workforce in the next 12 months”.