Optimism Is Infectious

The latest NFIB survey of small-business attitudes toward the economy shows that fears of a recession are receding

If a recession is lurking in the shadows of the current downturn shadows, it isn't visible to small-business owners, who are growing more positive about the economy.

As of May, 31% of small-business owners expect improved economic conditions for the rest of the year, vs. 13% who anticipate further weakening, according to the monthly survey by the National Federation of Independent Business (NFIB). This boosts the federation's "optimism index" to 99.5, a 1.1 point gain on the previous month.

The components that make up the index, including sales, profits, hiring conditions, payroll costs, capital spending, inventories, and credit conditions, are hinting at nearly 3% gross domestic product growth this year, concludes William C. Dunkelberg, chief economist for the NFIB. Last quarter, GDP grew by 1.3%. "The overall picture is one of continued subpar growth," he said, "but not as sub as earlier this year." At the same time, he acknowledges that labor markets are likely to continue weakening, which "can't be good for economic growth."

Some highlights from the May survey:

-- 57% of small-business owners applauded President Bush's economic policy; only 5% gave it a failing grade.

-- 24% cited taxes as the most important problem facing their business (these responses were collected before the new tax law was signed in June). The scarcity of qualified labor was cited by 17% as the biggest problem and 12% cited poor sales.

-- 66% of all businesses (a 3-point rise from the previous month) reported making capital outlays in the last six months, including 7% who started construction on new facilities and 13% who expanded or upgraded current buildings.

The number of small businesses planning to expand their workforce has declined substantially over the last year, but remains higher than those planning cutbacks, 22% vs. 6%.

Of the small-business owners surveyed, 25% reported sales gains in the last three months, while 31% reported lower sales. Profits are rising for 17%, falling for 41%.

By Theresa Forsman in New York

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