Optimism among Small Businesses Rebounds Fueled by Plans to Add to Payroll

By Rom Badilla, CFA

September 11, 2012

Sentiment by small U.S. businesses improved in August after three straight months of declines suggesting that owners that form the backbone of the U.S. economy and job growth expect better growth. The National Federation of Independent Businesses released results of its Small Business Optimism Index which climbed to 92.9 in August after a reading of 91.2 in the previous month. The improvement surprised the markets as the median of economists’ forecasts was at 91.4. While the Optimism Index is still below the recent high of 94.5 set in April, there were some noteworthy changes in the components that adds hope toward economic growth.

While recent activity for employment changes were fairly stagnant as evident by the Actual Employment Changes component which inched only slightly higher from a net percent of 1% to 2% in August, plans to add to the company payroll spiked higher.

The net percentage of business owners surveyed that are planning to hire in the next 3 months rose to 10% from 5% in July. The August print is the highest level since February 2008 and the largest increase since end of recession. The net percent is defined by the NFIB as the number of firms reporting increases minus the number of firms reporting decreases. There were a 736 firms responding to the survey.

In addition to the improvement in the employment sentiment, the net percent of businesses expecting a better economy rose by six percent to -2% in August which equals the highest reading since May 2010. In addition, this most recent number is now above the six-month average of -6%.

Furthermore, the net percentage of firms expecting higher sales reached 1% in August from a previous period reading of -4%. Other improvements include the number of firms reporting increases in capital expenditures. The net percentage of firms increasing investments rose to 24% versus 21% in July.

While there were some positive signals emanating from the details of the report, not all components improved. More firms are reporting that they are not able to find suitable workers increased as the component increased to 18% from 15% in July. The net number of firms reporting an easing of credit conditions fell by two percent to -9% in August. Also the net percent of companies reporting that now is a good time to expand fell by one percent to 4% while the net percent of businesses seeing positive earnings trends fell by an equal amount to -28%.

While there were some components that were down suggesting some risks for improved growth for the small business segment of the economy, the headline number rebounded and more importantly, sentiment on job growth increased significantly. While the U.S. economy is licking its wounds from last Friday’s disappointing job growth figures, sentiment from the perspective of the small business owner looking to add to their workforce is improving.

Interestingly, the single most important problem facing small businesses were taxes according to 23% of the respondents. Other frequent responses from all who were surveyed were poor sales at 20% and government red tape at 21%.

Today’s data is by far not a game changer. However, keep in mind that besides Non-Farm Payrolls, economic data as a whole have been improving in recent months. This in turn, may place some doubt in the minds of policy makers that are looking to add major economic stimulus at the FOMC meeting set for this week. If the Federal Reserve fails to deliver with an expansion of balance sheet and if we assume that the recent rally in risk assets and equities is a result of increasing speculation of Quantitative Easing, then markets are at risk for selling off. Time will tell as all eyes will be focused on the announcement from the Federal Reserve set for Thursday.

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