U.S. Small-Business Index Falls to 13-Month Low on Outlook

Confidence among U.S. small businesses dropped to a 13-month low in August as fewer companies projected better economic conditions and improving sales, a private survey found.

The National Federation of Independent Business’s optimism index decreased to 88.1, the weakest reading since July 2010 and the sixth-consecutive decline, from 89.9 in July. The number of small-business owners saying they expected the economy will improve six months from now fell to the lowest level since 1980.

“Hope for improvement in the economy faded even further through the month,” William Dunkelberg, the group’s chief economist, said in a statement accompanying the index report. “With such a dim outlook, owners are not going to do a lot of hiring or expanding.”

Small-business owners have grown less confident that conditions will improve as stagnant job growth weighs on consumer sentiment. Households “uncertain about the future” won’t “engage in the spending that would help lead us out of the recession,” Dunkelberg said.

Six of the index’s 10 components decreased. The gauge of expectations for better business conditions six months from now led the decline, falling 11 points to a net minus 26 percent in August. The drop brought business assessment of the economy to the lowest level since the second quarter of 1980, when the measure fell to minus 37, according to Dunkelberg.

Sales Expectations

Sales expectations also plunged. The net share of owners projecting higher sales, adjusted for inflation, decreased 10 points to minus 12 percent, the weakest reading March 2009. Twenty-five percent of respondents reported “poor sales” as their top business problem.

A gauge of whether firms think this is a good time to expand decreased one point to a net 5 percent, the survey showed. The index of earnings trends fell by two points to minus 26 percent.

Confidence among U.S. consumers plummeted in August, raising the risk the largest part of the economy will support business less in coming months. The Thomson Reuters/University of Michigan final index of consumer sentiment fell last month to the lowest level since November 2008. In the week ended Sept.4, the Bloomberg Consumer Comfort Index dropped to the second- lowest level this year.

On the positive side, the NFIB’s measure of respondents planning to hire over the next three months rose three points to a net 5 percent, according to the report released today. Eleven percent of businesses said they plan to hire, up one percentage point from the prior month. Twelve percent indicated they plan to cut staff, a one point increase from July.

Labor Department figures released on Sept. 2 showed payrolls were unchanged in August, while the unemployment rate held at 9.1 percent.

Stimulate Hiring

To help stimulate hiring, President Barack Obama yesterday presented to Congress a $447 billion job growth package. The proposal grants businesses a 3.1-point reduction on taxes they pay on the first $5 million of their payroll, a limit that skews the benefit toward smaller firms.

Plans for capital investment over the next few months gained one point to 21 percent, according to the survey. A net minus 5 percent plan to add to inventories, down two points from July, and the lowest level since March 2010.

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.

Limited Demand

Limited demand helped reduce inflationary pressures. The same number of small business owners reported cutting average selling prices as did those who reported raising them. A net 16 percent of business owners plan price hikes, down 3 points from the prior month, according to the survey.

“The continued weakness in sales trends has blunted small business’s ability to raise prices after two years of price cutting to liquidate excess inventories,” Dunkelberg said. Federal Reserve Chairman Ben S. Bernanke’s “assumption that the spike in inflation would be short-lived may in fact have been an accurate one.”

The NFIB report was based on 926 small-business owner respondents through Aug. 29. 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 reporter on this story: Alexander Kowalski in New York at akowalski13@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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