Small Business Optimism Up Slightly in August: Report

While small business optimism rose last month, business owners are increasingly frustrated with the government.

The 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, according to research from the National Federation of Independent Businesses.

The Bureau of Labor Statistics reported 67,000 new private sector jobs in August, but 45,000 were from education and health care, which are heavily dependent on government spending, not exactly "Main Street" companies. Eleven percent (seasonally adjusted) reported unfilled job openings, up one point from July but historically very weak, the report's authors noted. Over the next three months, eight percent said they 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 fourth time in the last 22 months.

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, the report noted. Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock.

"The Index has been below 93 every month since January 2008 (32 months), and below 90 for 25 of those months, all readings typical of a weak or recession-mired economy. Near the beginning of the recession in 2008, USA Inc. shareholders elected a new CEO and management team but unfortunately the change in leadership did nothing to curb the recession," the report stated. "In fact, the economy only got worse while new policy tactics enacted by management made little sense in terms of dealing with the main problems. Now, the shareholders are more than restless and unnerved by what they see coming out of Washington."

A net negative 15 percent of all owners reported gains in inventories, four points better than July but still considered by the NFIB as "very weak." The report noted that inventories had been built in the expansion to satisfy the spending of a consumer that was saving virtually nothing. "August 2010 is the 29th negative double digit month in a row and the 39th negative month in a row for inventory reductions," authors William C. Dunkelberg and Holly Wade wrote. "Inventories at the -big' firms may start to accumulate as orders from small firms (many of whom are the final interface with the consumer) weaken."

Reports of positive profit trends improved three points in August, registering a net negative 30 percentage points, 26 points worse than the best expansion reading reached in 2005. Dunkelberg and Wade noted the persistence of this imbalance is bad news for the small business community. "Profits are important for the support of capital spending and expansion. Not seasonally adjusted, 18 percent reported profits higher (unchanged), but 42 percent reported profits falling, a three point improvement from July," they wrote. "Seasonally adjusted, a net 3 percent reported raising worker compensation, only five points better than February's record low reading of negative 2 percent."