Confidence at U.S. Small Companies Increases to Three-Year High

Confidence among U.S. small businesses rose in November to the highest level since the recession began three years ago as more companies projected the economy and sales will improve, a private survey found.

The National Federation of Independent Business’s optimism index increased to 93.2, the highest since December 2007, from an October reading of 91.7. Seven of the index’s 10 components rose and three declined. The measure averaged 100.7 during the previous expansion.

A brighter outlook for the world’s largest economy means small-business owners may pick up the pace of hiring after the jobless rate reached a seven-month high. With more businesses expecting higher sales, the survey also signals an increase in consumer spending, which accounts for 70 percent of the economy.

“It was encouraging to see substantial improvement in expectations for economic performance, critical if spending and hiring are to elevate beyond survival and replacement levels,” William Dunkelberg, the group’s chief economist, said in a statement. “Plans to hire, make capital outlays and invest in inventories all rose, albeit from historically low levels.”

The gauge of expectations for better business conditions six months from now rose to the highest level since June 2005, jumping 8 points to 16 percent in November, the report showed.

Increasing optimism amongst small businesses parallels gains in shares. The Russell 2000 Index of small U.S. companies has risen 28 percent since Aug. 31, compared with an 18 percent gain in the Standard & Poor’s 500 Index.

More Bankers

This outperformance has increased investors’ confidence in smaller companies and those that cater to them. Bank of America Corp., the largest U.S. bank by assets, in October said it plans to hire 1,000 employees in the next year to focus on companies with sales of $3 million or less.

Citigroup Inc., which claims 2,500 of the world’s 3,000 largest corporations as clients, is also targeting U.S. companies with less than $20 million of annual sales. The New York-based bank said it plans to hire about 200 employees by the end of 2011 to court them. That would bring the number of small- business bankers to about 500, or one for every two North American branches.

The measure of hiring plans over the next three months rose three points to a net 4 percent, according to the NFIB report. Nine percent of businesses said they intend in increase staff, up one percentage point from the prior month. Fewer indicated they plan to cut payrolls, with 12 percent anticipating workforce reductions, down from 13 percent in October.

Payroll Gains

Small companies have added jobs in every month since March, including a 54,000 gain in November, according to ADP Employer Services in Roseland, New Jersey, and St. Louis-based Macroeconomic Advisers LLC.

A gauge of whether small firms think this is a good time to expand increased two points to a net 9 percent, today’s survey said. Plans for capital investment over the next few months rose two points to 20 percent. A net zero percent plan to add to inventories, up four points from November.

The survey’s net figures are calculated by subtracting the percent of business owners giving a negative answer from those giving a positive response and adjusting the results for seasonal variations.

The net share of owners projecting higher sales, adjusted for inflation, increased five points to 6 percent, the highest since April.

Not ‘Supportive’

At the same time, the sales trends are not yet “supportive of a widespread recovery in the small business sector even if a bit stronger than October,” Dunkelberg said. Weak sales continued to be businesses’ top problem, with 30 percent of respondents listing it as their main concern.

“The historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new workers are not likely to pay back,” Dunkelberg said. “This is a major cause of the lack of credit demand observed in financial markets.”

Ninety-one percent of small businesses reported that their credit needs were met or that they were not interested in borrowing, the report showed. Banks have further eased standards and terms on some types of business and household loans in the past three months, according to a Federal Reserve survey of senior loan officers, released Nov. 8.

The NFIB’s index of earnings trends fell by four points to minus 30 percent.

Cutting Prices

Limited demand continued to keep inflation at bay. October was the 24th straight month that showed more small business owners cutting average selling prices than raising them.

Private payrolls jumped by 50,000 workers in November, less than forecast and the least since January, while the jobless rate rose to 9.8 percent, Labor Department figures showed on Dec. 3.

The NFIB report was based on 807 small-business owners surveyed through Nov. 30. Small businesses represent more than 99 percent of all U.S. employers and have created 65 percent of all new jobs in the past 17 years, according to the U.S. Small Business Administration. A small business is defined as an independent enterprise employing up to 500 people.

To contact the report on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story; Christopher Wellisz at cwellisz@bloomberg.net

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