Small business owners could be poised for a 1990s-like boom

Small business owners have reasons to stay optimistic.

With the economy still growing and the Federal Reserve expected to cut interest rates next week, economist Phil Powell told B-17 that small businesses are on the precipice of an era of prosperity and growth.

“There are bright days ahead, but it’s not going to be frantic,” Powell said. “It’s going to be a nice, steady, incremental improvement.”

Powell, who is the executive director of the Indiana Business Research Center and a business economics professor at Indiana University Kelley School of Business, said small business owners should not expect relief overnight, but gradually, they should start to feel easing financial pressures, such as more affordable credit.

Fed Chair Jerome Powell signaled on August 23 that it was time for the central bank to cut the Federal Funds rate, which has remained between 5.25% and 5.5% for over a year. This has spiked the interest rates small business owners are paying on new mortgages, credit, and loans.

According to the CME FedWatch Tool, there’s a roughly 75% chance that the Federal Open Markets Committee will decrease interest rates by 25 basis points and a 25% chance the Fed will decrease interest rates by 50 basis points.

Powell said that small business owners are poised to benefit regardless of the size of the cut and should remain hopeful about future growth.

“Falling interest rates are going to make credit easier to acquire,” Powell said. “If you’re a small business, whether you need a loan for a capital investment or a loan for working capital, it’s going to be easier to acquire, steadily.”

The brightening economic outlook goes beyond interest rates

Entrepreneurs have filed a record 19 million applications for new businesses in the past four years, and business applications remain elevated above pre-pandemic levels.

Additionally, small businesses created 71% of net new jobs since 2019, according to the Treasury Department.

While the small business economy can be volatile, and applications don’t always translate into successful projects, according to Powell, well-managed businesses are in for an era of stable growth.

In fact, Powell is bullish that small businesses are poised for a productivity boom like in the 1990s when there was a surge in tech startups surrounding the development of the internet.

Powell said that similar to the 1990s, the US economy has seen strong year-over-year growth in corporate profit, stock market growth, and increases in labor productivity.

Business labor productivity in the second quarter was up 2.7% year-over-year, which is an overlooked yet positive sign for economic growth, Powell said. He also said AI will further contribute to a productivity boom if entrepreneurs can learn to use it to save time.

Powell said solid economic growth is another positive sign for small businesses. According to the Bureau of Economic Analysis, real GDP increased 3% year-over-year in the second quarter of this year.

To be sure, many small businesses aren’t feeling the relief yet. According to the National Federation of Independent Businesses, small business confidence dipped in August. Yet, Powell said the economic data points to brighter days ahead despite the dip in optimism.

“The economy is much better than it feels, but our emotions lead us astray in terms of our impressions, even as business owners,” he said.

Economic indicators point to a soft landing, and small business owners who are struggling with high rates just need to make it through these next few months, Powell said.

“What they should be fearful of is that they’re going to get too pessimistic, and they’re going to make emotional business decisions, and they’re going to lose out on what could be several years of upcoming prosperity driven by right now,” he said.

Sean Higgins, an associate professor of finance at the Kellogg School of Management at Northwestern University, similarly told B-17 that interest rate cuts could be particularly positive for small business growth.

He said small businesses tend to be more credit-constrained, so changes in interest rates are particularly influential for business owners’ management decisions.

“They are often the ones that can be more affected by or benefit more once rates come back down, relative to larger businesses,” Higgins said.

Higgins said that interest rate cuts from the Federal Reserve would create access to cheaper credit, enabling small business owners — whether tech startups or mom-and-pop shops on Main Street — to invest further in growing their businesses or funding expenses.