The National Federation of Independent Businesses’ Small Business Optimism Index has fallen for the third month in a row, with small businesses reporting weak sales and tepid hiring plans.
While the drop was slight—.3 points, with the index settling at 90.9 in May—the index makes clear that optimism is moving in the wrong direction: a recession-level reading for an economy fighting its way through a recovery. A leading cause of the low reading is the stubborn problem of weak consumer spending, which is especially problematic for services, a sector dominated by small businesses.
“Corporate profits may be at a record high, but businesses on Main Street are still scraping by,” NFIB chief economist Bill Dunkelberg said in a statement. “Washington is throwing misdirected policies at the problem, offering tax breaks for hiring and equipment investment, but acting surprised when they don’t bear any fruit. The failure to understand why small-business owners are not hiring or investing has resulted in a set of policies that have not been very effective, and Main Street is suffering. The icing on the cake: the growing debt, large deficits, threats of higher taxes, regulations being spewed out by state and local administrations, and the uncertainty of the new health care law—is it any wonder that optimism is down?”
For the third month running, several key economic indicators continued their downward tumble. Job market indicators continued to deteriorate, anticipating very weak job creation and a higher unemployment rate. Capital spending plans and inventory investment plans all weakened and remain at recession levels. Inflation continues to rise, a notable business concern for owners who are raising their own prices at the fastest pace seen in years. And driving the economic uncertainty, one in four owners still report weak sales as their top business problem (followed by taxes and regulations and red tape, only 3 percent cite financing).
For small firms, the average employment change in May was +0.01 employees (per firm) over the past three months, or virtually zero. Twelve percent (seasonally adjusted) reported unfilled job openings, down 2 points and a clear signal that unemployment rates will rise. Over the next three months, 13 percent plan to increase employment (down 3 points from April, down 5 points from March), and 8 percent plan to reduce their workforce (up 2 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs.
Only 5 percent of small business owners view the current period as a good time to expand; of those who view it as a bad time to expand, 71 percent of those blame the weak economy, and 14 percent cite political uncertainty. The net percent of owners expecting better business conditions in six months was a negative 5 percent, 15 percentage points lower than January.
Capital spending remains historically low in spite of very low interest rates and all sorts of expensing incentives. Fifty percent of firms in May reported making capital expenditures over the past six months, and the percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 20 percent, a recession level reading.
Sales are down; the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 4 percentage points, falling to a net negative 9 percent, with more firms with sales trending down than up. Unadjusted, 23 percent of all owners reported higher sales (last three months compared to prior three months, up 1 point) while 36 percent reported lower sales (unchanged). The net percent of owners expecting higher real sales fell 2 points to a net 3 percent of all owners (seasonally adjusted), 10 points below January’s reading.
The seasonally adjusted net percent of owners raising average selling prices reached 15 percent, up 3 points. Thirty-one percent reported raising average selling prices which is twice the percent of owners who are cutting prices, suggesting that average price levels will be rising, or inflation.
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