Small Business Optimism Growing Glacially

The nation’s small and independent businesses are reporting gains in the economic environment, but the gains are barely discernible. The National Federation of Independent Businesses (NFIB) reported that its confidence index rose to 93.2, its highest level in 34 months, but still well below index values during the expansionary days of 2005, 2006, and 2007.

The index reached 103.7 three times in 2005, and last topped 100 in October of 2006. The index bottomed out at 81.0 in March of 2009. As the NFIB notes in its comments on the report, “the reading of 93.2 is still very weak, closer to a recession reading than indicative of a recovery.”

The report offers little evidence that hiring is in the immediate future for small businesses. About 9% of business plan to increase employment while 12% plan to reduce employment, which by NFIB’s calculation results in a net 4% of businesses planning to increase hiring. That’s better than losing more jobs, but hiring growth rates of this size won’t do much to reduce the number of unemployed.

Capital spending is a historical lows, and indicates that businesses are not expanding, but merely maintaining. Sales continue to be weak, with nominal sales down -15% over the past three months. As the report puts it, “Overall, it does not appear that sales trends are yet supportive of a widespread recovery in the small business sector even if a bit stronger than October.”

What is holding business owners back? Labor and materials costs are not the issue. For small businesses reporting weaker earnings in November, 56% cited weaker sales, 5% cited higher labor costs, 7% cited higher materials costs, 5% cited higher insurance costs, and 9% blamed lower selling prices. Only 7% of business owners blamed higher taxes and regulatory costs for shrinking profits.

Credit availability is not a problem either. Some 91% of businesses “reported that all their credit needs were met or that they were not interested in borrowing.” Just 4% of businesses reported that financing was the biggest problem.

The big problem is weak sales. Customers are not buying because they fear losing their jobs, they’ve already lost their jobs, or because they don’t have access to credit or don’t want to use the credit the have.

Restoring consumer confidence will result only from a brighter employment outlook. The Federal Reserve’s QE2 program is likely to have no more impact on employment than did its predecessor. The tax bill being debated in Congress right now could help some, but the best estimate for job growth is just a million new jobs. If that is in addition to the 150,000 or so new jobs needed every month just to keep up with new entrants into the job market, then that is a big deal. Far more likely is that the million new jobs will just ‘top up’ the jobs that are needed anyway.

What the survey says is that taxes and regulations are not the problem. Lousy sales are the problem. And sales won’t improve until people have jobs and money to spend.

Paul Ausick