California small businesses concerned about state’s economy

SAN FRANCISCO
March 10, 2008 12:01am

Small business owners across California have grown increasingly cautious, as the economic climate has become more uncertain, according to a survey done for Union Bank of California.

That caution is impacting profit outlooks for the year as well as spending and hiring plans, the survey says.

California’s economy was the No. 1 challenge facing small business owners surveyed in January, replacing workers’ compensation costs, which held the top spot since 2004.

The bank’s annual survey, which has been tracking trends among small business owners for the past eight years, found 52 percent of respondents statewide believe 2008 will be more profitable than 2007, a 15 percentage-point decline from last year’s results.

Half (51 percent) of the respondents reported greater sales in 2007, a 12 percentage-point drop from the previous year.

Respondents are showing caution with capital expenditures as the economy slows. Only 26 percent plan to increase spending on equipment and building improvements in 2008, while the majority (62 percent) plans to spend the same amount.

Another area where the majority of respondents plan to keep expenses the same: staffing levels. Seventy-one percent expect to maintain their staffing levels in 2008. Only 23 percent plan to add positions this year, a 7 percentage-point decline versus 2007. In 2006, 36 percent of respondents expected to add staff.

While most small business owners surveyed are not expecting to hire new employees, the majority is not planning layoffs, either.

Ninety five percent of respondents said they do not anticipate layoffs in 2008. However, 10 percent of those surveyed in January said they were forced to layoff employees for economic reasons last year.

“While the group surveyed has become increasingly concerned about California’s economy, a majority still expects an increase in profits in 2008, says Union Bank of California’s President and Chief Executive Officer Masa Tanaka. “That’s good news for California as a whole because small business is a powerful driver of the economy.”

The subprime mortgage crisis does not appear to be having a widespread impact across the state. Approximately 50 percent of respondents said they have seen no impact from rising foreclosures. However, for those respondents who have noticed a dip in business, the biggest impact has been felt in Riverside and San Bernardino counties.

In Riverside, 39 percent of respondents said customers are spending more conservatively. In San Bernardino, 45 percent have seen customers spending less. That compares to 35 percent statewide.

While the California economy has become the No. 1 challenge of nearly 50 percent of respondents, up 15 percentage points from 2007, worry about rapidly increasing workers’ compensation costs has declined. Thirty three percent of respondents surveyed are concerned about workers compensation costs, down from 43 percent in 2007. Small business owners surveyed ranked state and local business taxes as the third biggest challenge (26 percent).

The workers’ compensation crisis appears to have decreased as a major issue on several fronts. In addition to moving down on the list of challenges facing small business owners, only 19 percent of respondents said workers compensation insurance costs increased in 2008 compared to 20 percent in 2007. The majority – 65 percent – said their insurance premium remained the same, while 16 percent said costs declined.

For the third year in a row, a majority (55 percent) of business owners indicated that they do not offer healthcare coverage to employees, up from 52 percent in 2007. Santa Clara County continued to buck the trend, with 73 percent of its small business employers offering healthcare benefits.

For those employers that offer healthcare benefits, 40 percent said rising healthcare costs have not impacted their business, while 24 percent said they have shifted a larger portion of healthcare costs to employees or reduced health benefits.

Retirement benefits and 401(k) plans are scarce among small business owners surveyed. Only 17 percent offer 401 (k) plans and 12 percent offer retirement benefits. The most common benefit offered is vacation pay (62 percent).

In spite of the cautious outlook for 2008, respondents believe opportunities for growth continue to be the No. 1 advantage of doing business in California (28 percent). Family ties ranked No. 2 (22 percent) and climate No. 3 (17 percent).

Like many in the country, the small business owners surveyed are monitoring the presidential election. Forty-eight percent said they are paying closer attention to this year’s presidential race compared to previous years.

The Union Bank of California survey was conducted through individual interviews of nearly 2,000 small business owners from Jan. 7 to Jan. 18, 2008 throughout California. For purposes of the survey, Union Bank defined small businesses as firms with annual revenue of $15 million or below.