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Small businesses are waving the caution flag

The Wall Street Journal. logo The Wall Street Journal. 2/5/2019 Ruth Simon

a group of people standing in a room: New Orleans haberdashery Rubensteins had strong sales last year but is now cutting back on orders. © Rubensteins New Orleans haberdashery Rubensteins had strong sales last year but is now cutting back on orders. An Alabama welding supply company is delaying purchases of new gas cylinders. A men’s clothing store in Louisiana has trimmed fall orders for suits and high-end sportswear. An information technology consulting firm in California is holding back on planned hiring.

After a banner year, many small businesses are becoming more cautious about their investment and hiring plans. Some are responding to early signs of slowing sales, while others fear that tariffs, unstable financial markets, the aftereffects of the government shutdown and other headwinds could damp economic growth in 2019.

Economic confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide Inc. (Vistage polls firms with between $1 million and $20 million of revenue.) Just 14% of firms expect the economy to improve this year, while 36% expect it to get worse.

For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment, according to the survey, which was completed shortly before the 35-day federal shutdown ended.

“We could be at a turning point,” said Richard Curtin, a University of Michigan economist who analyzed the data. “Recessions are not made of one firm collapsing, but of many firms cutting back in marginal ways.”

Hiring in the broader economy continues apace despite the headwinds to growth. The Labor Department said on Friday that nonfarm payrolls rose by a healthy 304,000 in January.

Forty-two percent of those surveyed said the Trump administration had improved prospects for their business, down from a high of 52 percent in January 2018, and 34% said it had no impact. Nearly one in four small firms surveyed by Vistage said the Trump administration had hurt the outlook for their business.

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At Atlas Welding Supply Co. Inc. in Tuscaloosa, Ala., sales in 2018 grew at a 30% clip before flattening out in November and December. “People were inquiring a lot, but they didn’t pull the trigger, not nearly at the rate we saw a year earlier,” said Bill Visintainer, chief executive of the 28-person industrial gas and welding supply company. In the past 90 days, customers began taking longer to pay their bills, he said.

In response, Mr. Visintainer is being more cautious about his company’s spending. For example, he said he is delaying purchases of new high-pressure cylinders used to deliver gas until customers place orders, instead of steadily adding to his stock in anticipation of strong demand. “I hate to lower my expectations,” said Mr. Visintainer, who fears political turmoil and potential interest-rate hikes are making his customers nervous, increasing the chances the economy slides into a recession.

Many small firms remain confident. Southwest Geotechnical LLC, a 35-person engineering consulting firm in Las Vegas, plans to add about a dozen employees this year after hiring more than that in 2018. The firm, which serves mainly residential and commercial builders, also will spend about $150,000 on lab-testing equipment for the new hires.

“Business is rocking,” said company owner Justin Stratton. “I am being told by developers that they are looking for a banner year.”

Overall, 66% of small firms expect revenue to grow this year, according to the Vistage survey, down from 83% in January 2018.

In parts of the country, real-estate markets seem less robust. Latitude 38 Housing Services, which provides housing to students, technology workers and others seeking co-living spaces in the San Francisco area, is looking to pay down several million dollars of debt. It may sell one building to raise cash and is being more cautious about acquisitions and renovations.

“We definitely feel the market has peaked,” said Tony Brettkelly, chief executive of the 18-person company.

Some entrepreneurs say they are struggling to decipher the economic tea leaves. Kenny Rubenstein, the third-generation owner of Rubensteins, a 95-year-old New Orleans haberdashery, said sales of suits and sportswear were strong last year. But when Mr. Rubenstein recently placed his fall 2019 orders, he purchased just 75% of what internal reports suggested he buy.

“I’d rather play it safe at this point,” said Mr. Rubenstein, who has about 20 employees. “I’m divided right down the middle,” he added “Half of me is very positive. Half of me is very nervous.”

Alvarez Technology Group, Inc., an information technology consultant in Salinas, Calif., said its agribusiness customers have cut back on orders for software and hardware in response to tariffs and other economic uncertainties.

“The pipeline we have for projects and the pipeline we have for new clients willing to spend money with us, both of those have slowed,” said Luis Alvarez, the company’s chief executive. “We were projecting 15% to 20% year-over-year growth. We are not seeing that yet,” particularly in the agribusiness sector, he said. “Clients are not so much pessimistic as they are being cautious.”

The 38-person firm has delayed plans to add five new employees. It also has become more cautious about spending and made sure it has credit lines in place.

Gold Systems Inc., a government contractor in Salt Lake City that gets half its revenue from the Environmental Protection Agency and other federal agencies, expects to feel the aftereffects of the government shutdown through most of 2019, Chief Executive Dave Wilcox said.

The company has begun to receive payments on invoices that piled up during the shutdown, but even if Congress averts a second shutdown, Mr. Wilcox said, Gold Systems will “continue to be conservative in everything we do just knowing there may be some lasting impacts.”

Some business owners are looking to grow despite their concerns. Webfoot Painting Co., a carpentry and painting business in Bend, Ore., with 55 year-round employees, is expanding into Portland even though labor costs have increased and sales leads were down 5% in January.

To play it safe, Webfoot’s co-founders, Travis Ulrich and Gavin Hepp, didn’t take any quarterly distributions or annual bonuses for 2018. The company has stepped up marketing but is shopping for less costly software, and has done away with monthly crew and office team lunches, a $2,000 expense, Mr. Ulrich said.

“It’s batten down the hatches; hold on to your cash,” he said. “We are scared, but we are not playing scared. We are playing super-conservative with our cash.”

Write to Ruth Simon at ruth.simon@wsj.com

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