Small Business Optimism Drops, Report Finds

Cost-conscious business owners continue to feel gloomy about the economic situation in the U.S, as employment among small firms drops and weak sales continue.

The latest report from the National Federation of Independent Business (NFIB) found small business optimism remains stuck at recession levels. The NFIB determined the proximate cause is very weak consumer spending; 15 percent reported gains, while 43 percent reported weakness. However, the other major concern is the level of uncertainty being created by government. Ten percent of the owners reported raising average selling prices, but 29 percent reported price reductions. Widespread price cutting is a major factor driving the reports of lower nominal sales, the report noted. Seasonally adjusted, the net percent of owners raising prices was negative 17 percent (unchanged), far more cutting prices than raising them.

The Index of Small Business Optimism lost 0.8 points, falling to 88.3(1986=100), 7.3 points higher than the survey's second lowest reading reached in March: The lowest reading was 80.1 in 1980:2. However, in the 1980-82 recession period, the Index was below 90 in only one quarter and quickly surged to a record high level in early 1983. In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn.

In November, small business owners reported a decline in average employment per firm of 0.58 workers reported during the prior three months, an improvement from May -s record loss of 1.26 workers per firm, but still a loss of jobs. The report found nine percent of the owners increased employment by an average of 2.3 workers per firm, but 21 percent reduced employment an average of 4.2 workers per firm (seasonally adjusted), indicating the "job generating machine" is still in reverse.

Plans to raise prices fell one point to a net seasonally adjusted four percent of owners, 34 points below the July 2008 reading. On the cost or input side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the "back door" of the business) rose one point to three percent and only four percent cited the cost of labor. Reports of positive profit trends are at a net negative 43 percentage points, three points worse than October. "The persistence of this imbalance is bad news for the small business community and a contributor to the reported difficulties in obtaining credit," report authors William Dunkelberg and Holly Wade commented.

Not seasonally adjusted, 10 percent reported profits higher (down two points), but 51 percent reported profits falling (unchanged), and the NFIB noted spending or hiring would not increase until these trends reverse. Small business owners continued to reduce compensation at a record pace, with 10 percent reporting reduced worker compensation. Reports of increased compensation fell two points to nine percent. Seasonally adjusted, a net three percent reported raising worker compensation, down one point from October and a revisit of June's record low reading.

For those reporting lower earnings compared to the previous three months (51 percent, down one point), 61 percent cited weaker sales, four percent each blamed rising labor costs and higher materials costs, two percent blamed higher insurance costs, and eight percent blamed lower selling prices. Four percent blamed regulatory costs. Poor sales and price cuts are responsible for much of the weakness in profits, the report concluded.