Small business owners reported an increase in hiring, but a decrease in optimism last month, according to a new survey by the National Federation of Independent Business.

The NFIB Small-Business Optimism Index ended its upward trend in March, falling 2.6 points to 91.9—consistent with recession-level readings. The decline, which comes after several consecutive months of slow but steady growth, was driven by weaker expectations for real sales gains and business conditions, along with a marked deterioration in profit trends. Hiring and future plans to hire built on February’s gain and remain the bright spot in an otherwise discouraging report.

“It looks like everyone became more pessimistic in March,” said NFIB chief economist Bill Dunkelberg in a statement. “Or, perhaps, this is a ‘new normal’ and we are unlikely to see the surges usually experienced at the start of a recovery. Times are different; government, with new taxes and more restrictions, is a larger drag on the small-business community. Uncertainty continues to cloud the future while the government is persistently tone-deaf to the needs of those who create jobs and wealth. Today’s recession-level reading is, all in all, a real disappointment.” 

The decline in the percent of owners expecting higher real sales and better business conditions in the next six months account for 76 percent of the decline in the Index. There are no clear indicators as to why owners are expecting economic deterioration over the next six months, particularly when GDP and employment growth have maintained positive momentum.

Inflation is also on the rise. After two years of small-business owners reporting cutting average selling prices, March continued February’s trend by posting a net 9 percent who reported raising average selling prices. (This gain is 33 percentage points higher than the low in 2009 and 20 points better than September 2010.) A major force behind the price hikes is the elimination of inventory excesses which appeared in 2008. Small businesses are now seeking profits and price support. Increases in energy costs are expected to exacerbate problems for prices in the months ahead.

The brightest spot in March was on the employment side: the average employment change per firm was reported to be +0.17 employees over the past three months, unchanged from February, but still short of the needed 350,000 per month needed for the next three years to close the employment gap.

Ten percent of small employers reported increasing employment an average of 3.5 employees per firm, and 14 percent reported reducing employment an average of 2.5 employees (seasonally adjusted). Over the next three months, 18 percent plan to increase employment (up one point), and 6 percent plan to reduce their workforce (unchanged), yielding a seasonally adjusted net 2 percent of owners planning to create new jobs, down three points from February.

Small-business sales reporting took a small dip, with the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months declining by one point for a net negative 12 percent. While this reading is 22 points better than the recession low hit in March 2009, customer activity remains weak and remains a primary concern for many in the small-business community. Small businesses did not appear to have benefited much from the modest recent gains in consumer spending.

Reports of positive earnings trends deteriorated in March, registering a net negative 32 percent, 5 points worse than February. Not seasonally adjusted, 11 percent reported profits higher (down 4 points), but 49 percent reported profits (down 3 points). Large firms may be posting great profits, but the trend on Main Street is not supportive of solid hiring and capital spending.

Continuing the credit trend that NFIB has observed for months, the vast majority of small businesses (93 percent) reported that all their credit needs were met or that they were not interested in borrowing. The historically high proportion of owners who cite weak sales means that for many owners, investments in new equipment or new workers are not likely to “pay back”. Lack of demand—and not the availability of credit—appears to be the stalemate that is holding back loan growth.

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