Small Business Optimism Falls for Sixth Straight Month

An NFIB report found that sales remained the largest problem for small businesses.

Confidence in the economy among small-business owners tumbled in August, as the National Federation of Independent Business' monthly Small Business Optimism Index dropped a whopping 1.8 points, settling at a "disturbingly low" 88.1. The Index has now been in decline for a full six months. Unlike previous months, August's decline comes in the immediate aftermath of the debt ceiling debate, suggesting a small business "vote of no confidence" in the agreement reached in Washington, D.C.

Over the next three months, 11 percent plan to increase employment (up 1 point), and 12 percent plan to reduce their workforce (up 1 point), yielding a seasonally adjusted 5 percent of owners planning to create new jobs, a 3-point gain over July. Job creation saw minimal improvement from the previous month, according to the survey. Owners also reported reducing employment an average of 0.08 workers per firm over the past few months. This was an improvement from June's -0.23 workers per firm and July's -0.15, but still a poor showing, the NFIB noted. Fifteen percent (seasonally adjusted) reported unfilled job openings, up 3 points, which the organization said suggests the unemployment rate could ease a fraction or remain unchanged.

The results of this month's survey provide a window into how the debt ceiling debate impacted the outlook of the small business community. The July survey interviews were taken as the issue was debated; and the Administration's debt ceiling deal was announced just as NFIB mailed its first wave of interviews for the August survey. The resulting Index was one of the largest declines in owner optimism posted in the last six months. Expectations for real sales gains and improved business conditions account for most of the decline in the Index, the report noted. The four components in positive territory eased some of that loss, although not by much, landing the Index at a 1.8 point loss.

"The results of this month's survey are very telling," said NFIB chief economist Bill Dunkelberg. "The tumultuous debate over the nation's debt ceiling and a dramatic 11th hour -rescue' by lawmakers did nothing to improve the outlook of job-makers. In fact, hope for improvement in the economy faded even further throughout the month, proving that short-term fixes will not help. Private sector decision makers think longer term and they don't like what they see. There is little clarity or certainty. When people are uncertain about the future or fear it, they don't spend or invest, and they chase after protection-and protection is unlikely to come from the government."

The report found that sales remained the largest problem for small firms-a full quarter identifying "poor sales" as their top business problem. 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 9 percent, with more firms with sales trending down than up. Not seasonally adjusted, 27 percent of all owners reported higher sales (last three months compared to prior three months), down 2 points from the prior month, while 28 percent reported lower sales (unchanged).

Expectations for future sales are also in decline, with the net percent of owners expecting higher real sales falling 10 points in August, to a net negative 12 percent of all owners (seasonally adjusted), 25 points below January's reading. Not seasonally adjusted, 21 percent expect improvement over the next three months (down 6 points) and 34 percent expect declines (up 7 points). Owners appear to have lost confidence in the economy and the government's ability to assist the recovery.