Small Business Optimism Slides in July

For the fifth consecutive month, the National Federation of Independent Business monthly Small-Business Optimism Index fell, dropping 0.9 points in July—a larger decline than in each of the previous three months—and bringing the Index down to 89.9. This is below the average Index reading of 90.2 for the last two-year recovery period. Expectations for future real sales growth and improved business conditions were the major contributors to the decline in optimism. With the repercussions of the debt compromise yet unknown, next month’s report will provide a more complete picture of the reaction on Main Street, the organization reported.

The percent of owners citing poor sales as their top problem—the long-time primary complaint of firms—has faded a few points, and reports of sales trends are better than a few months ago. However, the July survey anticipates slow growth for the remainder of the year, high unemployment rates, inflation rates that are too high and little progress on job creation. The report is based on the responses of 1,817 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of July.

“Given the current political climate, the protracted debate over how to handle the nation’s debt and spending, and the now this latest development of the debt downgrade, expectations for growth are low and uncertainty is great,” said NFIB chief economist Bill Dunkelberg. “At the two-year anniversary of the expansion, the Index is only 3.4 points higher than it was in July 2009. And considering the confidence-draining performance of policy makers, there is little hope that Washington will stop hemorrhaging money and put spending back on a sustainable course. Perhaps we might begin referring to the ‘Small-Business Pessimism Index’ from now on.”

While the national unemployment rate dipped marginally, for the nation’s small businesses, the employment story is not a positive one. Twelve percent (seasonally adjusted) reported unfilled job openings, down 3 points. Over the next three months, 10 percent plan to increase employment (down 1 point) and 11 percent plan to reduce their workforce (up 4 points), yielding a seasonally adjusted 2 percent of owners planning to create new jobs, 1 point lower than June, leaving the prospect for job creation bleak.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 1 percentage point, falling to a net negative 8 percent. Currently, there are more firms with sales trending down than there are with sales trending up; however, this indicator is the third-best reading in 42 months. The unadjusted numbers are a follows: 29 percent of all owners reported higher sales (last three months compared to prior three months, up 2 points) while 28 percent reported lower sales (down 3 points).

Reports of positive earnings trends were unchanged at a net negative 24 percent of all owners, while not high, is the best reading in 43 months. Not seasonally adjusted, 20 percent reported profits were higher (up 2 points), and 38 percent reported profits falling (down 3 points). Corporate profits are at a record high level as a share of GDP, but these increases have not translated to Main Street, where even among the most optimistic of sectors, small manufacturing firms, only 23 percent reported higher earnings while 37 percent reported lower profits (not seasonally adjusted).