Industry Market Trends

Small Business Optimism Near Three-Year Low

Jan 16, 2013

Although optimism among small business owners inched up in December, it remained close to record-low levels, largely due to deteriorating conditions in the labor market and the high number of owners who expect business activity to worsen in the first half of the new year.

Small businesses in the United States struggled to gain ground in 2012, as sluggish economic growth and widespread uncertainty dampened hiring and investment plans. As a result, small business owners ended the year with a low level of confidence and a significant amount of pessimism regarding the short-term outlook for early 2013.

According to the latest Small Business Optimism Index from the National Federation of Independent Business (NFIB), optimism among small business owners climbed to 88 points in December, up slightly from the 87.5 reading in November but still marking the second-worst reading since March 2010.

Historically, index values over 100 signify a growing sector. At current levels, the index indicates considerable anxiety and a lack of confidence on par with the recessionary period.

Much of the weakness stemmed from year-end uncertainty about the fiscal cliff. Although the issue has been temporarily resolved, the lack of a permanent fix is likely to have a continued negative effect on small business.

"The eleventh hour 'deal' has brought marginal certainty about tax rates and extenders and will provide some relief to owners, but it certainly doesn't guarantee a more positive forecast for the economy," NFIB chief economist Bill Dunkelberg said in an analysis of the results. "And let's not forget what is looming on the horizon: a debate over the debt limit and a regulatory avalanche of historic proportions about to spill out into the country."

Seventy percent of owners said the current period is a bad time to expand their business, with one in four citing political uncertainty as the top reason to hold off on expansion. Among the top business problems, 23 percent of respondents cited taxes as the main concern, followed by regulations (21 percent), and poor sales (19 percent).

The net share of small business owners who expected economic conditions to improve over the next six months stood at negative 35 percent in December, the lowest level since monthly records began in 1999. Minus seasonal adjustments, 18 percent of small businesses reported higher sales in the final quarter of 2012, while 30 percent reported lower sales.

Despite a modest improvement, job creation also struggled last month. The average change in employment per firm increased to 0.03, up from -0.04 workers in November, with 11 percent of surveyed owners reporting they added an average of 2.9 workers per firm over the past few months, and 13 percent reducing employment by an average of 1.9 workers. The remaining 76 percent of owners made no net change in employment.

On a more positive note, fewer respondents had difficulty finding qualified workers last month. Among those small business owners who hired or tried to hire workers in December, 33 percent reported few or no qualified applicants for open positions, down from about 40 percent the previous month. However, the worker shortage is still surprising considering the high number of unemployed Americans.

"Despite the glut of workers, the share of small businesses saying they couldn't find the talent they wanted was generally rising from December 2009 until September 2012, when it reached its highest point since the recession began five years earlier," the New York Times' Economix blog reports. "What's especially odd about these survey responses is that if employers are having trouble finding qualified workers, they should be bidding up wages to attract the few qualified workers who are out there. But that's not what the data show."

Long-term unemployment may be one of the reasons why a third of employers are having trouble finding qualified workers, despite the surplus of unemployed people. Businesses are often reluctant to hire workers who haven't been gainfully employed in a long while, meaning that the same pool of available employees looks increasingly unattractive to companies as time goes on.

Meanwhile, the NFIB also claimed that capital spending among small businesses remains in "maintenance mode," down to a historic low and with capital outlay plans at recessionary levels. The percent of owners planning capital expenditures in the next three to six months rose 1 point to 20 percent in December. Only 8 percent of owners characterized the current period as a good time to expand facilities.

"Overall, these numbers suggest continued weaknesses in the small business sector over the course of the next few months. While the fiscal cliff deal did avert the worst-case scenarios for the economy, it also raised marginal tax rates for many small firms and failed to address our long-term fiscal challenges," Chad Moutray, chief economist for the National Association of Manufacturers, noted. "Smaller firms have tended to express more frustrations with the political process than others...Until business owners are able to express more confidence, I would expect them to continue to be more reticent about picking up their employment and investment spending."