The fortunes of small business are not solely tied to the local markets in which they operate, but are also affected by national and global events. Keeping a watchful eye on the big picture is key to remaining nimble in such uncertain economic times. If you are starting a small business or continuing with an ongoing business venture this year, here are the areas to keep your eye on in 2012.
Market Psychology: Get a pulse on customer sentiment. The December 2011 Consumer Sentiment Index rose to its highest level in eight months, indicating an increase in optimism about job prospects, the economy and buying in the year ahead. In addition, a recent National Federation of Independent Business Optimism Index of small-business owners showed a four-month trend of rising sentiment among this group.
But even with positive news, be wary. It is important to get a pulse on customer psychology to help determine whether 2012 will be a year of playing offense or defense. Consumers are notoriously fickle, particularly in times of great uncertainty, so these estimates require some consistency before we can declare 2012 as the year of the consumer. Don’t make any business-altering decisions until the positive outlook remains positive for a while.
Economic Policy: Get ready for a spike in political chatter surrounding small business. With the upcoming presidential election, get ready for more rhetoric around what Congress and the Obama administration could do legislatively for small business.
Don’t expect too much from the legislation we saw proposed by President Obama around the American Jobs Act in light of the political standoff in Washington. We will likely see overtures being made, but the stark reality is that stimulative policy measures for small business are highly unlikely to emerge until after next year. The recent extension of the payroll tax cut is going to be somewhat a nonevent for small business. The 2 percent reduction is beneficial, but is unlikely to significantly improve the fortunes of small business this year.
Credit: Cultivate relationship banking ties. The credit outlook for small business in 2012 is probably going to be on par, at best, with 2011. The Small Business Administration enjoyed record lending in 2011 as $30.5 billion in small business loans were made. Now, with the prospects dimming for a stimulus package in 2012 coupled with a Congress in little mood to increase spending, small businesses should expect SBA lending to shrink.
Local government initiatives to spur small-business activity could continue, but as revenue continues to melt away, small business may need to look toward private sources of capital.
On the banking side, credit markets remain tight, and 2012 will likely be no exception. The latest Federal Reserve credit underwriting survey showed nearly two-thirds of responding banks tightening credit terms on small-business loans. This suggests that banks continue to struggle with regulatory and market uncertainty, translating into credit availability on par with 2011 levels. However, smaller community banks may offer better terms than large banks that have their hands full.
Economic Performance: Stay up-to-date on the economic crises going on around the world. The real wild card for 2012 could be what happens to the U.S. economy and whether Europe is able to address its debt problems. As long as the crisis in Europe lingers, expect this to have a depressing effect on global economies and financial markets.
While market volatility will remain this year, the economy should grow. The housing market will likely experience continued weakness, which implies that unemployment rates could remain north of 8 percent this year. Any unexpected geopolitical event, natural disaster or economic surprise could of course further impede recovery.
With market fundamentals looking, at best, slightly better than last year, small businesses should expect 2012 to be another challenging year. With that as the backdrop, small-business strategy should focus on maintaining core value by not overreaching in their market while preserving capital where possible.
Cliff Rossi is an executive-in-residence and a Tyser Teaching Fellow at the Robert H. Smith School of Business at the University of Maryland. For more information on what 2012 means for small business, e-mail email@example.com.