Dropping just a tenth-of-a-point in the month of May, the Nation Federation of Independent Business (NFIB) Index of Small Business Optimism came in at 94.4. A reading of 94.4 is historically low and consistent with the sub-par performance of GDP and employment growth. The individual indicators were mixed, with expected sales in a three month decline. However, some employment components improved and profit trends remained relatively stable after its sharp gain in April.
 
“In the last year, small-business optimism has limped along, and today the sector is no better off than it was just over a year ago,” said NFIB Chief Economist William Dunkelberg. “The lack of progress is discouraging, producing no signs that economic activity will pick up this year at all. The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health-care costs, regulatory compliance costs, all of which are very uncertain. Most of this uncertainty is the result of what is happening—and not happening—in Washington. Investments in jobs or plant and equipment are not the priority while people are still bracing for the worst.”

Levels of hiring and spending remained depressed in May, as did plans to do more in the near future. Expectations for increasing future sales continued to be weak, far below readings recorded in any other recovery period since 1973. Sixty (60) percent of those surveyed said now is a bad time to expand their businesses; one in four of those owners cited political uncertainty as the main reason, second only to concerns about a weak economy.
However, prospective labor market indicators posted gains that built upon those reached in April. There was gradual improvement in reports of collecting and paying bills on time, and trade credit availability improved. Compensation continued to show some strength, and price hikes moderated.
 
Capital Expenditures: Based on data about capital expenditures, it appears that small-business spending is more for maintenance than for expansion. The frequency of reported capital outlays over the past six months rose 1 point to 55 percent, 11 points above the historic low last reached in August 2010, but still below readings from the first half of 2008. For historical context, an average of 60 percent of firm owners reported making capital outlays on 2007. Of those making expenditures in May, 37 percent reported spending on new equipment (down 2 points), 24 percent acquired vehicles (up 2 points), and 14 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (unchanged).  Overall, the sector exhibited small and incremental improvements in spending. The percent of owners planning capital outlays in the next three to six months dropped 1 point to 24 percent.
 
The report is based on the responses of 681 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of May. Download the complete Index of Small Business Optimism.

Read the full press release from the National Federation of Independent Business.