Photo by Austin Distel on Unsplash

Small businesses have been struggling lately and the smallest ones are facing even bigger challenges which could be an early warning signal for the economy.

Revenue for 30,500 sole proprietorships and other enterprises with just a few employees fell 3.4% in the first quarter from the same period last year according to Invoice2go, the seller of an invoice generator app for small businesses. Revenue growth also dropped from 14% in 2017 to about 3% last year.  

Invoice2go CEO Greg Waldorf said that “small service businesses are seeing a (pullback) in demand that’s indicative of a cooling economy and could be a leading indicator of recession.”

Small business sales decline

The data shared by Invoice2go are based on actual sales of small businesses instead of responses to a survey.

About 60% of Invoice2go’s customers are self-employed service businesses (e.g. plumbers, landscapers); while another 11% have one employee and 25% have two to five employees. Sales fell in nine of the 12 industries tracked last quarter. Only event services, outdoor services and technology companies posted sales increases.

Firms with fewer than 20 workers make up about 98% of U.S. businesses, according to the Small Business and Entrepreneurship Council.

A recent National Federation of Independent Business (NFIB) survey of small firms shows that 27% said sales were lower the past three months, which is higher than the 19% average in the second half of 2018. About 6% of the firms NFIB surveys are sole proprietorships, while about 60% have fewer than 10 employees.

According to a Wolters Kluwer Blue Chip Economic Indicators survey of 49 economists, the U.S. economy is expected to grow at an annual rate of 1.5% in the first quarter, down from 2.2% late last year and 2.9% for the whole 2018. 

Wells Fargo economist Mark Vitner said that the  main reasons why the  economy and business sales were weak were the 35-day partial government shutdown, low tax refunds because of the new tax law and the snowstorms in February which hurt weather-sensitive sectors such as retail, construction and restaurants.

Vitner, like many economists, expects the economy to pick up for the rest of the year but still at a lower growth than in 2018.

According to the latest issue of Duke University/CFO Magazine, two-thirds of chief financial officers predict a recession by the third quarter of 2020.

Invoice2go’s Waldorf believes that the drop in his small-business customers’ first-quarter revenue is a sign of a potential economic slump due to reasons other than government shutdown and bad weather. He noted that sales growth went down in 2018. His clients, he says, are among the most vulnerable firms and are likely the first to feel a shift in the economy before the big companies.

They are holding off on new hires and the purchase of new business machines.