Small Business Optimism Up Slightly In May

The National Federation of Independent Business Index of Small Business Optimism gained 1.6 points in May with a reading of 92.2.

Although not a strong sign of recovery, it’s going in the right direction. It is the best reading since September 2008′s 92.9 index that happened just before the five-point decline in October that started the deterioration in the fourth quarter of 2008. In May, seven of the 10 index categories rose, but job creation and capital expenditure plans barely made gains.

"The performance of the economy is mediocre at best," said William C. Dunkelberg, NFIB‘s chief economist. "Given the extent of the decline over the past two years, pent up demand should be immense, but it is not triggering a rapid pickup in economic activity."

Nine percent (seasonally adjusted) reported unfilled job openings, down two points and historically very weak.  Over the next three months, 7 percent plan to reduce employment (unchanged), and 14 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, two points better than the April reading and positive for the first time in 19 months.

The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, two points above the 35-year record low reached in December 2009. Of those making expenditures, 32 percent reported spending on new equipment (unchanged), 17 percent acquired vehicles (up two points), and 11 percent improved or expanded facilities (up one point). Five percent acquired new buildings or land for expansion (up one point), and 10 percent spent money for new fixtures and furniture.

"Compared to past recoveries, it is clear that the current economic recovery has not impacted the expectations of small business owners.  They do not trust the economic policies in place or proposed and are distressed by global and national developments that make the future more uncertain," said Dunkelberg.

The net percent of all small business owners reporting higher nominal sales in the past three months improved four points to a net negative 11 percent, 22 points better than a year ago, and up 14 points in the past two months. It’s the best reading since April 2008. But, the May reading indicated that more firms are still experiencing weakening sales trends that are seeing improved sales.

Unadjusted, 23 percent of all owners reported higher sales (last three months compared to prior three months, up six points) while 38 percent reported lower sales (down three points). 

"The numbers are looking a lot better, but still are negative and are clearly worse than the 1983 recovery period," said Dunkelberg.

A net-negative 28 percent of small businesses reported positive profit trends in May, three points better than April’s reading and 15 points better than in May 2009. Not seasonally adjusted, 17 percent reported profits higher (up three points), but 49 percent reported profits falling (down 2 points).

"The May figures represent significant improvements, but it is hard to ignore the magnitude and persistence of the negative reports," said Dunkelberg.

Regular NFIB borrowers (32 percent accessing capital markets at least once a quarter, one point above the survey record low) continued to report challenges in arranging credit. A net 13 percent reported loans harder to get than in their last attempt, down 1 point from April and down two points from March.  Overall, 92 percent of the owners reported all their credit needs met (or they did not want to borrow).

"The small business sector is in maintenance mode, not growth," said Dunkelberg. "The best thing Washington and state legislatures can do is adopt a ‘do no harm’ mentality. If they want small business owners to start hiring again, they need to stop considering policy proposals that raise the cost of doing business."