Growth Strategies

Small Business Owners’ Outlook Declines

They list higher wages as their top concern and have little hope the economy will improve.
Sarah JohnsonSeptember 20, 2006

The malaise about the economy continues. Small business owners’ optimism is the lowest it’s been since March 2003, says a recent survey by the National Federation of Independent Business. This rise in pessimism nearly mirrors the rising negativity CFOs feel about the U.S. economy, a pessimism that’s at a five-year high, according to the most recent Duke University/CFO Business Outlook Survey. Both groups say higher wages play a top role in their concerns.

The NFIB rates the optimism of small business owners in a monthly index, which fell by two points in August. The change arose out of weaker sales gains, fewer price hikes, and rising labor costs, which is becoming a big concern for companies. Business owners blame the lack of qualified workers as their top business problem. Still, they are willing to pay for skilled workers: The percent of small business owners reporting higher worker compensation increased to 25 percent, according to the NFIB survey.

“They are in the hole as far as getting the staff they need,” NFIB chief economist William Dunkelberg told CFO.com. Last month, 84 percent of the more than half of NFIB’s member companies that tried to hire or did hire employees struggled to find qualified workers. In fact, 25 percent reported that they are unable to fill a job opening, say Dunkelberg, who attributes these findings to the U.S.’s tight labor market. Seventeen percent plan to increase employment levels.

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In the quarterly Duke University/CFO survey, CFOs pointed to the lack of skilled labor as a reason for wage inflation, mainly for consulting, construction, and high-tech jobs. On average, companies reported plans to raise wages and salaries 3.5 percent in the next year. In the survey’s 10-history, financial executives listed consumer demand as their number-one concern, followed by rising labor costs. If consumer demand weakens any more, 34 percent of CFOs will cut back on hiring, and 29 percent will cut back on capital spending.

For NFIB’s survey, small business owners’ capital spending has been flat this year. Spending has not changed much from the previous NFIB surveys: 45 percent bought new equipment, 26 percent acquired vehicles, 14 percent improved or expanded their facilities, 14 percent purchased new fixtures and furniture, and 7 percent purchases new buildings for land for expansion.

The small business owners who reported lower earnings during the past three months (34 percent) gave the highest blame to weaker sales, at 34 percent, along with costlier materials (18 percent), expensive labor (15 percent), lower selling prices (12 percent), and higher insurance, finance, regulatory costs, and taxes (3 percent each). The survey numbers seem to point to an economy that will not perform as well in the second half of the year. Consumers may start saving more, and retailers may hold back on how much they put on their shelves, according to Dunkelberg. Small business owners “are expecting the economy to slow down, and as a consequence they’re not going to add as much to inventory, and in fact they might reduce their inventory,” he says.

According to NFIB, small business owners have shown a few “cautionary signals”: regular borrowing activity is at its highest level in 30 years, when the survey was taken. Forty-six percent of small business owners reported borrowing, up eight points since the July survey. The number of owners having an increasingly harder time getting necessary financing increased by one point, the highest it’s been since 2000. Only 4 percent said the cost and availability of credit is a main problem.

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