Although economic conditions have improved for a number of sectors, small businesses continue to struggle with managing costs, strengthening revenue and obtaining capital. Conditions are improving, but will we see a full-fledged rebound?

Small businesses and startups have been especially vulnerable to the effects of the economic recession, and many smaller companies have struggled to weather the storm. New data suggest that business conditions are gradually improving for small business, but it remains unclear whether these positive signs will be enough to trigger a full-scale turnaround.

According to a recent survey of 2,197 small business owners conducted by the National Federation of Independent Business (NFIB), released this month, the small business outlook is starting to improve, with the optimism index gaining 3.8 points in April to reach 90.6. This is the first time in seven months the index has surpassed a reading of 90, with a 10-point gain in net sales, marking the strongest reading since September 2008. The net percent of owners expecting to see real sales increases rose nine points to reach six percent.

“The gains are a step in the right direction, but they are not enough to signal a solid recovery is in place,” William Dunkelberg, chief economist of the NFIB and an author of the report, said in an announcement of the findings. “Owners are feeling a little better about things, but not enough to turn them into concrete action.”

The NFIB’s positive profits index improved by 12 points in April, and without seasonal adjustment, earnings rose for 14 percent of small business owners but fell for 51 percent. Among those making a profit, 57 percent cited stronger sales as the key factor, while 7 percent credited lower labor costs.

According to the NFIB, small business capital spending has risen by one point over the past six months, with 46 percent of smaller firms reporting expenditures. Of those, 32 percent reported spending on equipment (up two points from six months ago), 15 percent on vehicles (down one point over six months) and 10 percent on improved or expanded facilities (up two points from six months ago). Only 19 percent of businesses said they plan to increase capital expenditures in the near future, only slightly above the 35-year low.

Although demand has improved, spending remains significantly depressed, and until sales make a major rebound, expenditure is expected to remain low for the foreseeable future.

“What small businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities,” Dunkelberg explained. “Bottom line, the recovery will be sub-par in comparison to the recoveries we experienced following past severe recessions such as 1980-82.”

The sluggish pace of the recovery can be seen in the small-business hiring rate, which remains constrained. According to the NFIB’s index, average employment per firm was at negative 0.18 in April and has fallen steadily each quarter since July 2008. Over the next three months, 14 percent of small business owners plan to create new jobs, while 7 percent expect to reduce their payrolls.

A recent report from payroll company Automatic Data Processing found that medium-sized businesses (employing between 50 and 499 workers) increased employment by 17,000 jobs in April, while small businesses (employing fewer than 50 workers) added only 1,000 jobs. Small and medium-sized companies in the goods-producing industries shed 27,000 jobs, while manufacturing firms added 29,000 positions.

“In March, President Obama passed legislation offering two new tax credits designed to encourage employers to hire unemployed workers or individuals only working part time,” the Wall Street Journal reports. “But such incentives still aren’t prompting some small businesses to create jobs.”

Government efforts to aid small businesses have yielded mixed results so far. The credit outlook is particularly challenging, as business lending has been tight throughout the economic downturn and federal stimulus initiatives have not influenced small business loan conditions as positively as expected.

A May report from the Congressional Oversight Panel found that “small business credit remains severely constricted.” Although the U.S. Treasury Department has launched several stimulus-related initiatives aimed at improving the country’s financial health, “it is not clear that these programs have had a noticeable effect on small business credit availability.”

“When asked about standards on C&I [commercial and industrial] loans to smaller firms, almost all domestic banks, regardless of size, reported little change. However, net fractions of domestic institutions reported tightening terms on C&I loans extended to smaller firms,” the U.S. Federal Reserve Board explained in a report on April credit conditions. In addition, most banks stated that credit card loans for small businesses “are currently tighter than the longer-run average level that prevailed before the crisis.”

While sales and general optimism among small businesses are on an upward trend, it will take a significant boost in demand before smaller companies resume hiring or making major capital outlays. Credit availability will also be an important factor in enabling small businesses and startups to grow, but it remains to be seen how a sustainable turnaround will take shape.

Earlier: SMEs See Signs of Recovery

Resources

Small Business Economic Trends
by William C. Dunkelberg and Holly Wade
National Federation of Independent Business, May 2010

Small Business Optimism Index Improves in April
National Federation of Independent Business, May 11, 2010

April 2010 National Employment Report
Automatic Data Processing, Inc., May 5, 2010

At Small Businesses, Hiring Still Drags
by Sarah E. Needleman
The Wall Street Journal, May 10, 2010

May Oversight Report: The Small Business Credit Crunch and the Impact of the TARP
Congressional Oversight Panel, May 13, 2010

The April 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices
The Federal Reserve Board, May 3, 2010