The Hiring Continues
Defying expectations, employers keep adding jobs and the economy stays strong.
Good Morning!
Here are today’s highlights:
We may be facing a future where digital ads are written by algorithms and for algorithms.
Business owners report that banks are tightening the screws.
New Jersey has a program that allows unprofitable startups to sell their losses.
“Screwed by Stitches:” Local yarn shops have been left in the lurch by one of the industry’s biggest events.
HUMAN RESOURCES
Once again, employment has surged: “U.S. employers added 339,000 jobs in May as the labor market showed resilience in the face of rising interest rates and elevated inflation. The job market added more positions in recent months than previously thought, as well. March and April’s totals were both revised upward for a net gain of 93,000 jobs, the Labor Department said Friday. May’s rise marked the 29th straight monthly increase in employment. The unemployment rate rose to 3.7 percent, still near historic lows but an uptick from April’s 3.4 percent.”
“Business services, health care, construction, and transportation and warehousing were among the sectors adding jobs. Low unemployment has put pressure on wages as employers compete for scarce workers. Wages grew a solid 4.3 percent in May over the prior year.”
“‘Even if Americans are worried, they’re still behaving like the economy is fairly strong,’ said Daniel Zhao, an economist at Glassdoor.” READ MORE
Massachusetts employers may be on the hook for a $2.5 billion unemployment trust fund mistake: “Massachusetts mistakenly used about $2.5 billion in federal money to fund jobless benefits during the pandemic — payments that should have been made by the state. State officials did not disclose how the mistake was made. It dates to 2020, but wasn’t found until recently, the Executive Office of Labor and Workforce Development said this week in response to questions from the Globe. The problem won’t affect unemployment recipients, the office added. While the bookkeeping was botched during the previous administration, it falls to Governor Maura Healey to figure out how to reimburse the federal government. A pivotal question is how much of this cost — if any — will be borne by employers, who pay into the state unemployment trust fund to cover jobless benefits.”
“Employers are already paying additional fees into the trust fund to cover payments on $2.7 billion of bonds sold by the state last year. Proceeds from the bond sale are being used to repay federal loans the state took out to meet the huge surge in jobless claims during the pandemic, and to provide a cushion for the trust fund.”
“Business groups are upset by the prospect of having to pay even more. ‘There needs to be some answers about what happened in the prior administration and who knew what, and when,’ said Jon Hurst, president of the Retailers Association of Massachusetts.”
“Massachusetts isn’t the only state to be hit by fraud or to make mistakes when administering federal pandemic benefits known as Pandemic Unemployment Assistance for independent contractors, gig workers, and others not covered by state benefits. ‘Every state made mistakes rolling out PUA,’ said Michele Evermore, a senior fellow at the Century Foundation and a former Labor Department official who worked on modernizing unemployment insurance systems. ‘Things were just so chaotic.’” READ MORE
MARKETING
Digital ads are facing some challenges: “Users hate them, they’re easily exploited in fraud schemes, and they encourage controversial business practices such as tracking. They also might not work very well: Studies suggest that most users ignore them, and roughly a third of display-ad clicks are believed to be accidental. But the ad-supported internet is about to get worse. Many publishers are already motivated to generate as much content as possible, for as low a price as possible, for the largest audience possible. Now we can add to this derivative fluff a flood of articles that were written by programs. In the ChatGPT era, we face a future of low-quality content automatically churned out, itself ‘read’ only by other algorithms as they train themselves up and by bots generating fraudulent ad clicks—a ‘gray goo’ internet created by algorithms, for algorithms, and shunned by everyone with a pulse. Ads already make the internet less usable; the effect will only be magnified as we’re forced to wade through the sludge.”
“Far fewer than 1 percent of people who see a given ad next to content will click it, on average, and about 40 percent of internet users in the U.S. employ an ad blocker. The result is an online arms race, with ever more determined ad networks fighting to get their inventory in front of the public’s unwilling eyeballs.”
“For the tech giants, one solution to this is to better match advertisers with users through improved targeting. This is usually presented as a win-win-win situation: We get advertisements we’re more likely to appreciate, brands get a better result from their campaign, and both the website we visit and the ad network get more money. But the reality is very different.” READ MORE
FINANCE
Business owners continue to report that banks are reining in lending: “Tamara Keefe, owner of Clementine’s Naughty & Nice Creamery in St. Louis, said she moved forward with plans to open two new locations based on her bank’s assurances it would provide two loans and a line of credit, backed by the Small Business Administration. But the bank moved slowly, said Keefe, and she drained cash reserves to cover the costs of the build-out, equipment and inventory. The bank gave the business a $150,000 emergency line of credit, secured by Keefe’s life insurance, then told her she had to repay the credit line to close on the new SBA loans.”
“Keefe said when she received a term sheet in May, the premium over the prime rate was larger than expected. The bank also boosted cash-flow requirements. ‘I am down to the wire,’ said Keefe, who opened her newest shop on May 15. ‘The loan is not closed,’ she said. ‘I’m devastated.’”
“The new loans, totaling $1.1 million, carry a variable rate, currently 11.5 percent, well above the 6 percent fixed-rate loan she sought last year. Keefe said she is likely to fund future expansion by bringing in equity investors. ‘I have to change my business model because I can’t rely on my bank,’ she said. ‘It’s been months and months of frustration.’”
“Nearly half of banks reported stricter loan standards for small businesses in the past three months, according to a survey of senior loan officers released by the Federal Reserve Board in May. More than half said they expect to tighten small-business lending standards further in 2023.”
“Many small businesses are reluctant to borrow, particularly at today’s high rates. The median interest rate for a variable-rate, small-business term loan was 7.44 percent in the fourth quarter, the last period for which data is available, up 3.42 percentage points from a year earlier, according to the Federal Reserve Bank of Kansas City.” READ MORE
Meanwhile, unprofitable startups are raising money by selling their own losses: “For most tech startups, it can take years to reach profitability. And during that time operating losses pile up on the balance sheet. The New Jersey Economic Development Authority is currently accepting applications for the state's Technology Business Tax Certificate Transfer Program, more commonly referred to as Net Operating Loss (NOL) program. The program allows unprofitable technology startups in the state to sell their losses to more established companies, such as Bank of America and Subaru. Those companies can then deduct those losses from their taxable income, cutting the amount of money they pay in taxes.”
“The seller gets to monetize those accounting assets for cheap, non-dilutive capital and the buyer gets a break on their tax bill. It transforms what is one the biggest challenges for startup founders, cash burn, into a valuable commodity. Last year, the program distributed $75 million to unprofitable New Jersey tech companies.”
“The NOL program is part of a suite of programs designed to support New Jersey startups. The state has its own venture fund which invests up to $600 million a year alongside private VCs. It also runs a startup accelerator, a seed fund for Black and Latino founders, and a fellowship for first time entrepreneurs that offers checks of up to $400,000.” READ MORE
PRICING
Ranchers are shrinking cattle herds, which is why your steaks and burgers are costing more: “Years of persistent drought conditions, which make cattle more expensive to raise, pandemic disruptions and widespread cost increases have prompted ranchers to sell off livestock, bringing the number of cattle in the U.S. to its lowest level in nearly a decade. U.S. beef production is on track to drop by more than 2 billion pounds in 2024, the biggest annual decline since 1979, according to Agriculture Department data. With costs rising for nearly every aspect of raising cattle, ranchers say they are running out of reasons to replace the livestock they send to slaughter, let alone enlarge their herds. ‘We’re spending $1 million to make $4,000,’ said Ryan Stromberger, a rancher in southwest Nebraska just outside the city of Ogallala who also has two feedlots.”
“Prices for ground beef, up more than 20 percent since 2020, could hit record highs this summer during peak grilling season and an estimated average retail price of $5.33 a pound this year, according to analysts at agricultural lender Rabobank.”
“David Benowitz, president of Craft and Crew Hospitality, said the Wayzata, Minn., restaurant operator recently agreed to a deal to secure 200,000 pounds of beef at a set price that will go toward supplying its menus of steak bowls, burgers, and its popular French dip sandwich.”
“Benowitz said the company, which has six locations in the Twin Cities area, will likely have to renegotiate the deal when its restaurants use up their current beef allotment. There’s a limit to how much the company can raise prices, given its customer base of neighborhood regulars, he said: ‘If it gets too high, you…look at putting other dishes on the menu.” READ MORE
CONFERENCES
Local yarn businesses have been ghosted by one of their industry’s biggest events: “XRX Inc., which — after running one of the biggest American knitting events, Stitches, for more than 30 years — has vanished with minimal explanation. Its disappearance has shocked the network of small, mostly woman-owned yarn businesses that paid thousands of dollars to register up to a year in advance for shows. Knitting instructors who taught Stitches workshops over Zoom, meanwhile, haven’t been paid for their work. ‘A company ghosted everyone,’ said Karida Collins, owner of Neighborhood Fiber Co. in Baltimore, Maryland, which is owed about $5,000 in registration fees. ‘It feels very weird.’”
“That bizarre development began spreading through knitting circles on May 15 after Stitches — which Collins described as the community’s Comic Con — said its future events were canceled, its parent company was dissolving and that it ‘no longer exists.’ It gave little explanation other than blaming ‘the present economic climate.’”
“Social media accounts for South Dakota-based XRX have since vanished. Chief Executive Officer Benjamin Levisay’s Facebook and Instagram accounts? Gone.”
“Posts on the ‘Screwed by Stitches’ Facebook group — which counts nearly 1,000 members — have instructed shops that used credit cards to pay registration fees to contest those charges. Collins said she’s contested her charges with American Express.” READ MORE
STARTUPS
Donuts to dollars: “The latest local startup company to arrive at an incubation program offered by Pittsburgh International Airport is converting food waste into fertilizer for plants. Ecotone Renewables joins a half dozen other local startups that have partnered with the airport's xBridge innovation platform, which took off in 2020 to give budding companies the opportunity to validate their products and receive feedback on them. The airport, in turn, gets the benefit of implementing the region's emerging technologies into its operations.”
“This latest partnership has Ecotone taking about 500 pounds of stale donuts, coffee grounds and other food waste every week from the Dunkin’ Donuts concession store located near the airport's security checkpoint and converting it into about 50 gallons of its ‘Soil Sauce’ fertilizer, which is then sold to farmers or home gardeners across 50 retail locations.”
“Ecotone is able to do this with the use of its on-site Zero Emissions Upcycling System (ZEUS), a repurposed shipping container consisting of pipes and tanks that can perform an advanced method of composting at scale and autonomously. The whole process is powered by the biogas that's generated as a byproduct of the system.” READ MORE
THE 21 HATS PODCAST
Best Of: What It Takes to Build a Business: So, I decided to give the 21 Hats Podcast crew this past week off. Between the Memorial Day holiday and our first 21 Hats in-person event in Chicago—attended by five of the podcast regulars—it seemed the right thing to do. It also seemed like a great opportunity to reprise one of our favorite all-time episodes. We first published it in December of 2021, and it features highlights taken from the podcasts we’d published up until that point that cover many of the risks and rewards of business ownership, including what it’s like to sell your business, to fire an employee, to risk your own home in order to get financing, and even to deal with serious mental health issues. If you’re new to the podcast, I think you’ll find that these conversations bring real context to the journeys of the entrepreneurs you’ve been following here. But even if you’ve heard some of these discussions before, I think you’ll find them a refreshing reminder that choosing to build a business can be a noble mission, but it generally doesn’t come with an owner’s manual. We’re all figuring it out as we go.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren