Small Business Optimism Falls, Economists Lower Growth Estimates
Small businesses became more pessimistic in August, according to the National Federation of Independent Business (NFIB). Their Small Business Optimism Index fell from 94.1 in January and 89.9 in July to 88.1 in August. This nearly matches where the index was one year ago.
Economic concerns were behind this decline, with 53 percent saying that the economy was not good and 13 percent noting economic uncertainty. The single most important problem continues to be poor sales, as cited by 25 percent of respondents. On the other hand, if one were to add together regulatory and tax concerns, this would top sales at 37 percent.
Small business owners on average expect sales to fall in the coming months. Twelve percent more of these owners see their sales falling than those who expect increases in the next three months. Likewise, more small businesses shrank employment than expanded it over the last three months. Looking ahead, a net 5 percent expect to hire, an improvement from July (which was a net +2 percent) but still not suggesting fast growth.
Meanwhile, the National Association of Business Economics (NABE) reported in its quarterly Outlook Survey that real GDP is expected to grow 1.7 percent this year, down from the earlier estimate of 2.8 percent made in May. Similarly, business economists foresee 2.3 percent growth in 2012 instead of 3.2 percent.
The reasons for the downgrade are multifaceted. First, the Bureau of Economic Analysis has reported much slower growth in the first half of this year than many economists expected (0.4 percent in the first quarter and 1 percent in the second). Second, businesses have faced a number of significant headwinds this year, from supply chain disruptions to rising raw material prices to falling business and consumer confidence. Growth in spending has been flat as a result.
In addition, one cannot discount that this survey was conducted in August, so U.S. fiscal challenges and European financial market worries were no doubt at the forefront of economists’ minds. Indeed, at the NABE annual meeting in Dallas, which I attended, the sentiment among many economists was that Europe’s problems would likely get worse before they would get better. With such an overhang of doubt regarding the euro, it is not hard to see how so many economists – including me – have downgraded their growth estimates of late.
Chad Moutray is chief economist, National Association of Manufacturers.