WASHINGTON-- Dipping for a second consecutive month, after ending several months of slow growth, the Small Business Optimism Index gave up 0.2 points, falling to 91.2. The decline, while less anticipated given the Supreme Court decision on the health-care law and a flurry of activity surrounding the fiscal cliff, still leaves owner optimism disturbingly low and at recession levels, said the National Federation of Independent Business (NFIB).
The Index has oscillated between 86.5 (July 2009) and 94.5 (February 2012) since the recession officially ended in June 2009. Prior to 2008, the Index averaged 100, well above the current reading. During the economic recovery, now three-years-old, the Index has averaged 90, making this the worst recovery period from a recession in the NFIB survey history (which began in 1973), the group said.
"Congress has recessed without a plan to resolve our calamitous debt/spending cycle or a lasting answer to our dangerous fiscal cliff," said NFIB chief economist William Dunkelberg. "Meanwhile, the White House has presented us with some 'fuzzy math,' asserting that only 3% of small businesses will be impacted by planned tax increases. That's not true. The denominator in that calculation is wrong--it should be the six million employer firms that provide jobs to half the private sector workforce, meaning that more like 15% of small businesses can expect higher taxes in January. The lack of meaningful actions to address tax reform in Washington adds to the certainty of sluggish growth for the remainder of 2012, and the uncertainty of what will come in 2013."
According to July's report, more owners indicated that they expect business conditions will be worse (and not improved) in six months, and more owners expect real sales volumes to be lower than those who expect them to be higher in three months. This in part explains the lack of any need to hire more workers or to buy new inventory. Job creation plans are historically very low; only five% of owners think the current period is a good time to expand.
Some other highlights of July's Optimism Index include:
Capital Expenditures: The frequency of reported capital outlays over the past six months gained two points to 54%, still failing to get out of the rut they have been stuck in since early 2008. In 2007, an average of 60% reported making capital outlays. So, it appears that spending remains in "maintenance" mode. Of those making expenditures, 38% reported spending on new equipment (up one point), 19% acquired vehicles (up one point), and 14% improved or expanded facilities (up three points); 6% acquired new buildings or land for expansion (up one point) and 10% spent money for new fixtures and furniture (down three points). Overall, the stats are consistent with the sluggish performance of the economy. The percentage of owners planning capital outlays in the next three to six months was unchanged at 21%, a dispiriting result. Only 5% characterized the current period as a good time to expand facilities (seasonally adjusted) in contrast to 10% last December and 28% in December 2004, just to illustrate how weak the current reading is. The net percentage of owners expecting better business conditions in six months was a -8%, a two-point improvement; 20% reported "poor sales" as their top business problem, down three points. Overall, the outlook is not conducive to a lot of new capital spending or hiring.
Sales: While "poor sales" has been eclipsed by other concerns as the top business problem, it still remains the No.1 issue for 20% of owners surveyed. Consumer spending remains weak. The net percentage of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost four points, falling to negative nine%, this after a seven-point decline in June. The five-year high of a net 4% was reached in April. The low for the cycle was a net negative 34%, set in July 2009. The net percentage of owners expecting higher real sales lost one point, falling to a net -4% of all owners (seasonally adjusted), producing a five-month decline of 16 percentage points. What looked like the beginning of a recovery in sales and expectations has fizzled, very similar to what occurred in 2011.
Job Creation: July looked a lot like June in terms of job growth--it was negative. The reported net change in employment per firm over the past few months (seasonally adjusted) was -0.04; not as poor as June's -0.11, but still negative at a time when growth is needed. Readings had been on the rise; from December to May they were zero or positive, suggesting that employment might be turning around. But June, and now July, have ended that possibility. Seasonally adjusted, 10% of owners surveyed added an average of 3.0 workers per firm over the past few months, but 11% reduced employment an average of 2.3 workers. The remaining 79% of owners made no net change in employment; 48% of owners hired or tried to hire in the last three months, and 38% reported few or no qualified applicants for positions. Overall, there was no meaningful job creation. The percentage of owners reporting hard to fill job openings held steady at 15% of all owners after falling five points in June; May's reading was the best in 47 months.
The report is based on the responses of 1,803 randomly sampled small businesses in NFIB's membership, surveyed throughout the month of July.
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