Growth Strategies

Late to the Party: Small Biz

A small-business optimism index shows a decline in December, falling behind the hopefulness shown in surveys of larger companies.
Sarah JohnsonJanuary 11, 2011

Weak sales are continuing to keep small businesses cautious, according to a monthly barometer of small-business optimism.

Based on a survey of business owners done in December, the index released today by the National Federation of Independent Business (NFIB) shows that the moderate recovery being felt at large corporations is largely out of reach for smaller firms. Lower sales are cutting into these businesses’ plans for hiring new employees and making capital expenditures, causing them to make do with smaller staffs and aging equipment.

Still, the NFIB index shows signs of hope for the near future. Although the latest index lost 0.6 points compared with November’s survey, “new weaknesses did not appear either,” according to William Dunkelberg, chief economist for the trade association. (December’s reading of 92.6 marked the 36th straight month of recessionary levels for the index.)

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The organization notes that its members have not been able to take advantage of the 4% increase in consumer spending that economists presume occurred last quarter. Just over a third of the respondents reported lower sales, and only 18% said they had higher sales over the past quarter. More of them are cutting inventories to compensate.

To be sure, weaker sales are also hurting these companies’ profit potential, as are cuts in prices (although 15% of owners plan to raise them, the highest reading for the index in more than two years). In the meantime, more business owners reported their earnings have fallen quarter over quarter for the December index.

Less than half of the firms, 47%, made capital investments over the past six months. The money went toward new equipment (at 35% of those firms), vehicles (15%), improvements or expansion of facilities (11%), new fixtures and furniture (8%), and new buildings or land (4%). Twenty-one percent of the small-business owners surveyed plan to make capital outlays, reflecting a one point increase in the index, an expectation that “is still historically quite low,” according to the NFIB.

Other recent surveys of executives have shown better prospects for the future. The latest Duke University/CFO Magazine Global Business Outlook Survey showed higher optimism over the most recent quarter. The 848 CFOs of global companies polled in December expected to spend nearly 9% more on capital expenditures than they did last year, a higher prediction than the one made during the third quarter of 2010.

The Business Roundtable’s most recent survey of chief executives reported a higher forecast as well, with jumps in the percentage of CEOs expecting higher sales (80%) and higher capex (59%).