Small Business Turns Pessimistic

 | Dec 12, 2012 | 3:30 PM EST
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The National Federation of Independent Businesses' Small Business Optimism Index plunged 5.6 points in November, hitting 87.5, the lowest read since April 2009. This is one of the largest single-month drops in the survey's history. Only seven readings were lower, and all but one came in the last few months of 2008 and early 2009, during the depths of the last recession. Before 1986, when the survey was conducted quarterly, there were just two lower readings -- in the first quarter 1975 and the second quarter 1980 -- making this the 10th-worst showing since the survey began in 1973.

The NFIB notes that Hurricane Sandy did have some effect, but the decreased optimism was mostly related to a combination of the November election results and a stark view that the economy would worsen. (To determine if Sandy played a major role, the NFIB looked at states that were affected vs. those that were not directly affected by the hurricane.)

The biggest factor behind the decline in optimism, the NFIB said, is the expectation that future business conditions will worsen. The net percentage of owners expecting better business conditions in six months plunged by 37 points to a net negative 35%. Let's juxtapose this group's view with the Chicago Fed's recent Economic Outlook Symposium. According to the median forecast of symposium participants, the nation's economic growth in 2013 is expected to increase at a pace near its historical average, inflation is predicted to remain largely unchanged next year, and the unemployment rate is forecast to decrease slightly in 2013.

The consensus outlook shows that the rate of real GDP growth is expected to be 1.7% this year and then advance to 2.3% in 2013. In other words, these participants, who come from the manufacturing, banking and auto industries, as well as academia and consulting and service firms, expect economic conditions to improve in the coming year. That's not exactly robust growth, of course, but it is generally in line with the long-term potential growth rate of the economy. It's just not fast enough to reduce unemployment substantially.

According to economists at the Chicago Fed symposium, even though the unemployment rate is forecast to edge down only slightly to a still-high 7.6% by the end of next year, the consensus view is for consumer spending to rise at a moderate 2.3% pace next year. That is a bit higher than we've seen recently. And the pace of business spending is expected to strengthen in 2013.

How do you square the two camps? The simplest answer is to look at what concerns small businesses most: sales and taxes. Both are tied at 23% as the leading concern of the small-business owners surveyed. Small companies tend to operate in their local community, so their owners may be more in touch with their customers on a more personal level than a big business might be. That means the outlooks of smaller companies might be a better barometer than those of larger companies, even though larger companies tend to have dedicated economists to help develop strategy.

Of course, there is also the issue of taxes to consider. If a small business is a sole proprietorship or an S corporation, profits are taxed at the owner's personal tax rate. Any campaign by Washington to raise tax rates on the wealthy (or eliminate certain deductions) is more likely to be of concern to these companies than to larger, publicly traded entities. The NFIB attributes much of the decline in the mood of small businesses to the political climate and outlook.

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