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July 21, 2014

Less economic uncertainty leads to more hope for small businesses

Richard C. Lord

Five years after the Great Recession officially ended, small employers in Massachusetts are suddenly feeling better about business conditions and prospects. The Associated Industries of Massachusetts' Business Confidence Index, stuck for almost two years in a narrow range around 50, which is neutral on its 100-point scale, has begun to move upward, averaging 53.8 for the second quarter. That has been driven primarily by more positive responses from firms with 25 or fewer employees.

The change seems significant. For several years, the index showed a clear gradation of confidence by employer size: those with more than 100 employees were the most positive, mid-size (26 to 100 employees) a bit behind, and small employers far back, persistently negative. Now, the small and mid-size groups are virtually even, just below the overall Index, with the large respondents somewhat higher.

The lessons of the recession were about uncertainty: the Fed hadn't conquered the business cycle, huge corporations could crash, home prices could fall, financial rules of thumb weren't immutable laws. The long, stumbling recovery has been buffeted by new blasts of uncertainty from Washington — the debt ceiling crisis, the “fiscal cliff,” the government shutdown — each of which sent business confidence tumbling.

Tossed on the stormy sea of global economics — at the mercy of policies focused elsewhere — small employers felt less in control of their fate than larger ones. They also faced some particular issues of their own. Reserves and margins were thin. Hiring or training skilled workers was more difficult. Long-standing supply chains were disrupted, and new markets, especially outside the U.S., were hard to reach. Many, subject to personal rather than corporate taxation, experienced tax hikes.

In this recession-recovery cycle, Massachusetts has, for once, fared better than the U.S. as a whole, partly through luck but also because Beacon Hill has avoided both Washington-style deadlock and the fiscal crises and reactive revenue measures that marked past downturns. (In AIM's survey, employers have consistently rated in-state conditions above those prevailing nationally.)

But an unexpected source of local uncertainty has been the implementation of the federal Affordable Care Act. While the ACA's similarities to existing state law are making the transition relatively smooth for many employers, differences in market segmentation and ratings standards affect smaller employers specifically. They heard warnings from their insurance brokers that health benefit premiums were unpredictable and could rise sharply. As time passed, some saw those increases; most did not, and uncertainty waned.

Now, it has been a while since Washington knocked down business confidence with a new fiscal crisis. The national economy has regained stability, if not its full vigor. Strong job creation in recent months — even through the first-quarter economic contraction — tells us that uncertainty no longer dominates the outlook for employers in Massachusetts and across the U.S. And small employers, who have been the most uncertain, share in the rising confidence.

Richard C. Lord is president of Associated Industries of Massachusetts. Contact him at rlord@aimnet.org.

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