Small business confidence remains low

Sub-par growth expected in second half of 2010

The National Federation of Independent Business Index of Small Business Optimism gained 0.7 points in August, rising to 88.8. Most of the improvement was accounted for by gains in expected real sales and expectations for business conditions six months out, the two components that lowered the index in July. But despite their improvements, both measures are still in recession territory.

Sub-par growth expected in second half of 2010“Small business owners are expecting sub-par growth in the second half of 2010,” said Bill Dunkelberg, NFIB’s chief economist. “Consumers are pessimistic, business owners are pessimistic and Washington’s leadership has been unable to inspire any confidence in the future.”

Average employment growth per firm has been negative since April of 2007 and remained negative for 10 of the 12 following quarterly (first month in each quarter) readings. August brought no improvement, with reported job loss averaging negative 0.3 employees per firm (seasonally adjusted).

Eleven percent (seasonally adjusted) reported unfilled job openings, up one point from July but historically very weak. Over the next three months, 8 percent plan to increase employment (down one point), and 13 percent plan to reduce their workforce (up three points), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, down one point from July but positive for the 4th time in the last 22 months.

The frequency of reported capital outlays over the past six months fell one point to 44 percent of all firms, again hitting the 35-year record low. Of those making expenditures, 29 percent reported spending on new equipment (down one point), 14 percent acquired vehicles (unchanged) and 11 percent improved or expanded facilities (unchanged). Two percent acquired new buildings or land for expansion (down one point), and 7 percent spent money for new fixtures and furniture (down two points). Basically, expenditures are weak across the board.

Seventy-three percent of all owners said the current period was NOT a good time to expand. Of those, 69 percent cited the poor economy as the reason, but 18 percent blamed the political environment, unchanged from July.

“If the poor political environment is top of mind for nearly 1/5th of those opposed to expanding, it is likely second on the list for most of the others,” said Dunkelberg.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months was unchanged from July at a net-negative 16 percent, 18 points better than June 2009 but indicative of very weak customer activity. Unadjusted, 25 percent of all owners reported higher sales (last three months compared to prior three months, down one point) while 33 percent reported lower sales (unchanged). Widespread price cutting continued to contribute to reports of lower nominal sales.

“What businesses need are customers, giving them a reason to hire and make capital expenditures and then they may have the need to borrow to support those activities,” said Dunkelberg. “Washington doesn’t seem to understand this. Their proposals to improve the economy typically focus on easing credit conditions or giving businesses incentives to spend. These policies are unlikely to help most small businesses whose main problems remain poor sales and uncertainty over the economy.”