For small local owner-operated businesses, federal government budget sequestration is yet another sucker-punch provided by an economy still nowhere near recovered from the major meltdown of 2008 and the ensuing Great Recession. Sequestration translates to federal employee furloughs and various cutbacks in government spending, the combination of which decreases the disposable income of the local workforce. Reductions in disposable income equate to fewer dollars available to purchase goods and services from the local business community. With spending cuts of $85 billion scheduled for fiscal year 2013 and another $100 billion on the horizon for 2014, the total amount of money to be taken out of the U.S. economy via sequestration over the next decade is a whopping $1.4 trillion. The dollar values associated with sequestration represent money no longer available to the "Main Street" economy, the milieu where locally-owned small businesses operate.
Federal government sequestration cuts, which began to take effect on March 1st 2013, loom large over the entire United States economy, with the small business owner likely to absorb the brunt of their impact. The cuts will be especially painful to certain regions of the country, including the greater Washington, DC area, which is particularly vulnerable due to the region’s heavy dependence on federal military and civilian spending. According to the Washington Post (3/7/13), “Four of every 10 dollars in the regional economy flow directly from the federal government in the form of federal salaries, contracting for defense or civilian work or transfer payments such as Medicare and Social Security. If you account for how much of that money supports other sectors of the economy, such as entertainment, the overall impact of federal spending is even larger.” Despite representing about 5 percent of the U.S. population, the DC, Maryland, and Virginia region “is absorbing about one-fifth of the job losses related to sequestration, or about 330,000 positions," according to the New York Times (9/29/2013). Sequestration is having a major negative impact on the region’s local business community, as household disposable income is adversely affected by the spending cuts.
Other communities across the nation absorbing negative sequestration impacts include those with military installations, which are found in nearly 400 counties throughout the United States. This is not surprising, as one-half of the sequestration spending cuts come from the military budget. According to the Financial Times (9/29/2013), the military community sequestration impact is worth slightly more than $300 per person annually. Combine this with expected layoffs and reduced spending by defense contractors, the aggregate hit to consumer disposable income from cuts in the military budget due to sequestration represents significant lost sales for the nation’s small businesses.
Bottom line: Sequestration equals fewer dollars available for purchases at small businesses.
As the sequestration cuts continue to roll out through 2013 and 2014, the impact on local economies is widespread and unavoidable. Already, we are living in a society where literally there is not enough money flowing through the macro economy to provide jobs and incomes for everyone who needs one or to provide sufficient operating revenue for every established business venture. It is becoming a game of musical chairs with fewer and fewer chairs (good jobs) for contestants (workers) and, as a result, there is a scarcity of dollars to support businesses both large and small. According to the International Labor Organization, the middle class has shrunken from 61 percent of U.S. adults in 1970 to 51 percent today, and associated median income has fallen 5 percent during that period. Consequent with such middle class population and income shrinkage is reduced per capita disposable income, which means there is less money for consumers to spend in their local economies.
Across the nation each community has its own specific set of risk factors for the small businesses operating in that area, but every small business faces similar threats from their established corporate competitors. For example, a small mom-and-pop business located in North Beach, Maryland, a tiny enclave on the Chesapeake Bay, risk factors include: (1) “off the beaten path” location in sleepy bayside town far removed from heavily trafficked shopping malls and other destinations; (2) dependent on seasonal foot traffic, which is related to popularity of beach, boardwalk, and summer events, and ebbs considerably during winter months; (3) macro economic impact, which includes ongoing sluggish economy, sequestration, end of payroll tax cut (=$1000 average drop in annual per capita disposable income), and related; (4) the mom-and-pop’s inherent competitive disadvantage to well-known corporate chains and big box superstores, with their massive national advertising budgets, prime locations, price advantages due to economies of scale, and tax and regulatory advantages unavailable to the owner-operated small business venture.
If local small businesses hope to remain profitable in the sluggish U.S. economy, they must find ways to hold on to existing customers and to acquire new customers using low-cost methods, without directly engaging or challenging the deep-pocketed corporate competition. If maintaining or growing the customer base has been difficult in recent years, this reality should come as no surprise. American households, on average, have been operating on tightening budgets since the 2008 crash and ensuing Great Recession. Here is evidence of the reduced spending capability among American households:
1) Nearly 75 percent of U.S. households have only enough income to barely cover normal expenses or less. Only the top 25 percent of households can afford anything beyond the basics. [From a 2013 CBS News poll]
2) Since the 2008 economic meltdown, higher-paying jobs are being replaced by lower-paying jobs. Specifically, those jobs paying in the $20/hour to $30/hour range are being replaced by those paying $9/hour to $13/hour. This represents a considerable overall drop in the U.S. standard of living and considerably diminished consumer disposable income and spending capacity. [From several sources based on U.S. Dept. of Labor statistics]
3) In November 2007 before the onset of the Great Recession, there were 139 million jobs in the United States. Currently, there are only 132 million jobs, despite annual increases in the working age population. More people and fewer jobs means there is little money in the economy to spend on non-essentials. [Statistics reported in the Wall Street Journal, Feb. 16, 2013]
So, what does this mean? How do small businesses find enough consumer dollars in a stagnant economy to sustain or increase revenue? In order to survive, the local business must grab market share (=customers) from the major chains, which are exceedingly profitable, and work to retain its own customer base. The small business owner must encourage satisfied customers to visit more frequently and encourage them to entice their friends, family, and colleagues to patronize the establishment as well. Simply put, there are not enough consumer dollars available for all businesses. Small businesses must cannibalize market share from big businesses to survive; cannibalizing from other small businesses does not help the situation. It is necessary to divert big business customers to small businesses.
To ensure survival, the local small owner-operated business must divert consumer dollars before they are spent at a shopping mall or elsewhere. Regular folks (=your customers) do not have much surplus disposable income. You must grab those dollars before they get spent at the mall or at a big box store or a corporate chain or franchise. Keep in mind, too, that many of the dollars spent in those nationally branded establishments leave the local community to fill corporate coffers in some remote city. Dollars that leave the local region cannot have a positive impact on the local economy, the local community, or the quality of life of local residents. Those “lost” dollars can no longer be recycled through the local business community to sustain local businesses. Hence, consumer spending in locally owned-and-operated enterprises has the additional benefit of keeping money here on “home turf” providing vital support to local entrepreneurs.
Please Note: "Sequestration and Small Business Survival" is an excerpt from Mr. Bulko’s free Kindle e-booklet, Sequestration, Social Media, and You! If you would like a copy of the complete work, please send an email request to email@example.com.