Main Street confidence dropped again this quarter — the second setback this year and also only the second substantial decrease in the nearly four years since the start of the quarterly CNBC|SurveyMonkey Small Business Confidence Survey. The primary cause is simple: the election. Even as the coronavirus is resurging, state and local governments are again eyeing tighter restrictions, and businesses are bracing for flagging demand, it’s politics that’s driving economic expectations.
From the very first quarterly survey, which coincided with the first full month of the Trump presidency, political partisanship has been an underlying driver of the rosy outlook on Main Street. More small business owners — usually about 60% — are Republicans than Democrats, and their confidence has been bolstered by the fact that President Donald Trump, a Republican, holds the highest political office in the country.
Small business owners who are Republicans have expressed consistently higher levels of confidence in our survey, often scoring 20 points higher than Democrats on the 0 to 100 Small Business Confidence Index scale.
That all changed with the election of Joe Biden earlier this month. From the third quarter survey, conducted at the end of July, to the fourth quarter survey, conducted Nov. 10-17 after the election results were clear, the overall Small Business Confidence Index dropped to a score of 48 out of a possible 100, a new low. But, that drop was not universal: small business owners who are Democrats recorded a pop in confidence from a score of 46 to 58, while Republicans had a near-mirror-image drop from 57 to 42.
In fact, this quarter-over-quarter change marked the first time in the nearly four years of the tracking survey that Democrats reported an increase in confidence of five index points or greater, and also the first quarter in which Democrats’ score surpassed a score of 51. It was also the first time that Republicans’ score fell below 50.
Policy changes spur a partisan shift
A new administration and a switch in party control at the highest level of government means that new policies and regulations are sure to come. For business leaders, accommodating those changes can be a challenge; for small business owners in particular, doing so can be a real threat. Small business owners’ forward-looking expectations, rather than their assessments of the current business climate, are what has changed the most as a result of the election.
In some instances, Democrats and Republicans had previously been well aligned, but now they are split. In others, Republicans’ relatively high confidence fell, while Democrats’ low confidence rose.
On regulation, for example, small business owners of every political leaning had similar expectations in Q3: 33% of Republicans, 33% of independents, and 37% of Democrats said they expected government regulations to have a negative effect on their business in the next 12 months. This quarter, their views diverged dramatically, with the Republicans’ response skyrocketing to 72%, independents’ holding steady at 37%, and Democrats’ falling to just 11%.
Taken together, about half of small business owners (49%) now say they expect changes in government regulations to have a negative effect on their business in the next 12 months — a new high and a big jump up from 34% last quarter, but one entirely concentrated among Republicans.
On trade, Republicans and Democrats who own small businesses have essentially flipped their views from the third to the fourth quarter this year. Last quarter, twice as many Democrats as Republicans (39% vs. 17%) said they expected negative effects on their business due to changes in trade policy in the next 12 months. This quarter, four times as many Republicans as Democrats (48% vs. 12%) say they expect negative effects on their business due to trade policy changes.
On tax policy and immigration policy, too, Republicans’ and Democrats’ views have diverged in a similar fashion. Quarter over quarter, these index components that show the most substantial changes at the topline level all point back to the shift in presidential power and reflect an underlying divergence by party.
Coronavirus still has a dampening effect
What’s particularly notable about the big shift in confidence from the third to fourth quarter this year is that it is driven entirely by small business owners’ projections of what things will look like in the future rather than their assessments of the current business environment.
Despite the overall fall in confidence and the shifts in anticipation among Republicans and Democrats, small business owners report no change in current business conditions from Q3 to Q4. Last quarter, 36% of small business owners said current conditions for their business were good; this quarter, that number is a similar 39%.
Unlike the questions noted above related to expected policy changes, there was no divergence by partisanship in small business owners’ responses to the question on current conditions. Both last quarter and this quarter, 44% of Republicans described current business conditions as good. Among Democrats, 25% in Q3 and 28% in Q4 described current conditions as good.
That remarkable stability comes in a year where small businesses have had to weather huge setbacks resulting from the coronavirus pandemic. In the first quarter of this year, 56% of small business owners described current business conditions as good before that number dropped to 18% in Q2. It has yet to fully recover.
Joe Biden has said he will make tackling the coronavirus the top priority of his incoming administration even before he takes office in January. How well he handles the pandemic, alongside state and local leaders, will go a long way towards determining how quickly small businesses can get fully back to work, regardless of individual politics.
The CNBC|SurveyMonkey Small Business Survey for Q4 2020 was conducted across more than 2,200 small business owners Nov. 10-Nov. 17. The survey is conducted quarterly using SurveyMonkey‘s online platform and based on its survey methodology. The Small Business Confidence Index is a 100-point score based on responses to eight key questions. A reading of zero indicates no confidence, and a score of 100 indicates perfect confidence. The modeled error estimate for this survey is plus or minus 2.5 percentage points.