A Manic Depressive Cycle Hits The Small Business Sector

It was only a few months ago that the nation's small-business sector, exhilarated by a pickup in sales at the end of last year, exhibited a welcome surge of confidence about the economic outlook. Now, however, the latest quarterly membership survey of the National Federation of Independent Business reveals a dramatic mood change. After hitting its highest first-quarter reading since 1989, the NFIB's small-business optimism index sank in April to its lowest level since the recovery began.

What caused the loss of confidence? Instead of improving in the first quarter as respondents had anticipated, real sales actually weakened. "It's typical of what's been happening in this recovery," says NFIB economist William C. Dunkelberg. "Sales rise in one quarter and then tank in the next. Small-business owners are tired of getting their hopes up."

Chastened by last quarter's results, only 21% of the 2,200 businesses surveyed expect business conditions to improve over the next six months, compared with 38% in the first quarter and 44% a year ago. And they aren't adding workers. On average, small companies reduced their job rolls last quarter for the 11th time in a row. "Only the starting of new firms, which is not reflected in our survey, is adding anything to the employment picture," says Dunkelberg.

Indeed, though inventories rose in the economy as a whole last quarter, they actually declined a bit in the small-business sector. And small companies' plans to add to inventories in the months ahead have weakened--indicating little confidence that demand will pick up.

On the positive side, capital-spending plans by small companies, which rose significantly in the first quarter, remained relatively strong. And there's been a noticeable increase in the number of businesses that have either raised prices a bit recently or hope to do so, suggesting that companies are taking advantage of what little strength the economy possesses to improve margins. But the bottom line, says Dunkelberg, is that "small business is still waiting for evidence that the expansion has entered a higher growth track."

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