In a disappointing reversal of several months of slow but positive growth, June’s Index of Small Business Optimism dove three points, falling to 91.4. The decline is significant, and relinquished the gains achieved earlier this year.
Only one of the ten Index components improved; labor market indicators and spending plans for capital equipment and inventories accounted for about 40% of the decline. Political uncertainty remains historically high and continues to be a primary cause for a reticence among small-business owners to expand.
“All in all, this month’s survey was a real economic downer,” said National Federation of Independent Business (NFIB) Chief Economist William Dunkelberg. “The economy has definitely slowed; job growth will be far short of that needed to reduce the unemployment rate unless lots of unemployed leave the labor force—no consolation. Taxes remain a top concern for the small-business community. With the Supreme Court’s endorsement of the individual mandate as a tax in its health care decision, we will have to wait for July’s survey to realize the effect it will have on small-business confidence. With over 20 new taxes contained in the law—a price-tag of $800 billion—and most of the regulations yet to be written by HHS, the implications for employee costs remain unclear. Uncertainty reigns supreme for much of Main Street.”
June’s report also showed a reversal in earnings trends, chipping in 21% of the decline, and expectations for business conditions and real sales gains contributed 40% of the Index decline.
Nearly one-quarter of owners cite weak sales as their most important business problem (23%), followed by taxes (21%) and unreasonable regulations and red tape (19%).
Some other highlights of June’s Optimism Index include:
Capital Expenditures: Overall, the stats on capital expenditures are consistent with the sluggish performance of the economy. The frequency of reported capital outlays over the past six months dropped 3 points to 52%, failing to get out of the rut carved out in mid-2008. Of those making expenditures, 37% reported spending on new equipment (unchanged), 18% acquired vehicles (down 6 points), and 11% improved or expanded facilities (down 3 points). Five percent acquired new buildings or land for expansion (down 2 points) and 13% spent money for new fixtures and furniture (unchanged).
The percent of owners planning capital outlays in the next three to six months declined 3 points to 21%. Only five percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 2 points. The net percent of owners expecting better business conditions in 6 months was a negative 10% (an 8 point decline). Not seasonally adjusted, 25% expect deterioration in business conditions (a 5 point increase), and 14% expect improvement (down 4 points).
Sales: The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 7 points, falling to negative five percent, this after reaching a five year high of a net four percent in April. The low for the cycle was a net negative 34 percent (July 2009) reporting quarter over quarter gains. Twenty-three (23) percent still cite weak sales as their top business problem, historically high, but down from the record 33 percent reading in December 2010. Seasonally unadjusted, 26% of all owners reported higher sales (last three months compared to prior three months, up 1 point) while 28% reported lower sales (up 1 point). Consumer spending remains weak, especially on services. The net percent of owners expecting higher real sales lost 5 points, falling to a net negative three percent of all owners (seasonally adjusted), producing a four month decline of 15 percentage points. Not seasonally adjusted, 29% expect improvement over the next three months (down 7 points) and 25 percent expect declines (up 4 points). Expectations this weak are not likely to generate job creation or inventory investment.
Job Creation: Posting the first negative reading since December, the net change in employment per firm over the past few months (seasonally adjusted) was -0.11. Seasonally adjusted, nine percent of the owners added an average of 2.6 workers per firm over the past few months, and 12% reduced employment by an average of 2.8 workers. The remaining 79% of owners made no net change in employment. Forty-four (44) percent of the owners hired or tried to hire in the last three months and 33% reported few or no qualified applicants for positions. The percent of owners reporting hard to fill job openings lost 5 points, falling to 15% of all owners. This was a strong reversal of May’s result and suggests the unemployment rate will rise. Not seasonally adjusted, 10% plan to increase employment at their firm (down 7 points), six percent plan reductions, up 1 point. Seasonally adjusted, the net percent of owners planning to create new jobs fell 3 points to three percent, an unfortunate reversal of two months of improved readings.
Today’s report is based on the responses of 740 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of June. Download the complete study at http://www.nfib.com/sbetindex