Small Business Sentiment Plunges on Obama Reelection

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The latest issue of the NFIB Small Business Economic Trends is out today (see report). The December update for November came in at 87.5. This is the tenth lowest reading in history of this series.

Here is the opening summary of the report:

The NFIB Small Business Optimism Index dropped 5.6 points in November, bottoming out at 87.5. The two major events in November were the national elections and Hurricane Sandy, which devastated parts of the East Coast. To disentangle these, the results for the states impacted by Sandy were excluded from the computation for comparison. When separating the hurricane-impacted states from the remainder, the data makes clear that the election was the primary cause of the decline in owner optimism.

"Something bad happened in November—and based on the NFIB survey data, it wasn't merely Hurricane Sandy. The storm had a significant impact on the economy, no doubt, but it is very clear that a stunning number of owners who expect worse business conditions in six months had far more to do with the decline in small-business confidence. Nearly half of owners are now certain that things will be worse next year than they are now. Washington does not have the needs of small business in mind. Between the looming 'fiscal cliff,' the promise of higher healthcare costs and the endless onslaught of new regulations, owners have found themselves in a state of pessimism. We are forced to ask: is this the new normal?" -- NFIB chief economist Bill Dunkelberg

The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession.

NFIB optimism index 11 dec 2012

The average monthly change in this indicator is 1.29 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.

NFIB optimism index 3 month MA 11 dec 2012

Inventories And Sales

The findings on small business sales and sales expectations continue to highlight a fundamental source of distress.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was unchanged at a negative 15 percent. Twenty-three percent still cite weak sales as their top business problem, historically high, but down from the record 34 percent reading last reached in March 2010. Consumer spending remains weak, especially on services although auto sales have recently shown some strength. The net percent of owners expecting higher real sales fell 8 points to a negative 5 percent of all owners (seasonally adjusted), 17 points below the 2012 high of net 12 percent reached in February.

Credit Markets

Has the Fed's strategy of quantitative easing had a positive impact on Small Businesses?

Six percent of the owners reported that all their credit needs were not met, down 2 points. Twenty-eight (28) percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem, compared to 23 percent citing taxes, 23 percent citing weak sales and 18 percent citing unreasonable regulations and red tape. Thirty (30) percent of all owners reported borrowing on a regular basis, unchanged from October. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10 percent (more owners expect that it will be "harder" to arrange financing than easier), 2 points worse than in October. Whatever QE3 is doing, it isn't changing the expectations of business owners about credit availability or costs in the coming months.

Labor Markets

The NFIB labor market indicators are at recession levels and weakened from last month.

The plunge in owner optimism did not drag the labor market indicators down proportionately, but they were at recession levels to begin with. Job creation weakened a bit from the October reading, with the average change in employment per firm falling to -0.04 from 0.02 workers. Ten (10) percent of the owners (down 1 point) reported adding an average of 2.4 workers per firm over the past few months, and 11 percent reduced employment (up 1 point) an average of 3.1 workers (seasonally adjusted). The remaining 79 percent of owners made no net change in employment.

NFIB Commentary

This month's "Commentary" section includes a small business perspective on GDP:

The growth [in GDP] in the third quarter was revised up from 2 percent to 2.7 percent. The bad news was that most of the upward revision was in inventory accumulation, government spending and an improved trade deficit, unlikely to be as supportive in the fourth quarter. Consumer spending was revised down substantially as the NFIB sales reports indicated, and there are no signs of improvement. Spending on services was revised down to 0.3 percent and this is 70 percent of consumer spending and a sector that is dominated by small business (education and health care aside). Consumer sentiment (University of Michigan/Reuters) crashed, whatever the cause, it does not bode well for consumer spending. For the millions of unemployed held captive by Washington politics, it will not be much of a "Merry Christmas."

Business Optimism and Consumer Confidence

The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so I've plotted it on a separate axis to give a better comparison of the volatility from the common baseline of 100.

NFIB optimism and Consumer Confidence 11 dec 2012

With the latest NFIB data, we see that the mood of small businesses has diverged to the downside in comparison to Consumer Confidence. It will be interesting to see the if next Consumer Confidence report follows the NFIB trend.

Source: Advisor Perspectives

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