Small-Biz Owners' Confidence Drops

Energy prices, Mideast turmoil, and Fed rate hikes led to trimmed expansion plans and a drop in optimism among Midwestern owners in July

Conflict in the Middle East and rising energy prices weighed on Midwestern small-business owners' confidence in July, according to the National City Small Business Confidence Index, a monthly survey polling 2,730 small-business owners about their general economic outlook and their hiring plans. The survey is conducted by National City Corporation (NCC), a Cleveland-based finance company.

Both indices that comprise the composite index declined in July. The economic outlook index fell by 3.6 percentage points and the hiring plans index declined by 1.5 percentage points. The month's total decline of 2.5 percentage points was the largest on record and drove the 19-month-old index, which measures the attitudes of small-business owners in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, and Pennsylvania, to a new low.

"Given the record of gas prices, as well as more aggressive behavior on the part of the Fed, we have determined through talking to bank clients in the Midwest that optimism [among small business owners] is down significantly," says Richard DeKaser, chief economist for NCC.


  Interest rate hikes have fueled the fire caused by rising gas prices. The Fed has raised its target for short-term interest rates 17 times since mid-2004, to the current 5.25%. The latest hike came on June 29. The U.S. economy also cooled last quarter, as gross domestic product grew at a 2.5% annual rate, below Wall Street analysts' forecasts for 3% and less than half the 5.6% rate registered in the first quarter.

Small companies are feeling the burn of higher gas prices. "Gas prices affect my company a lot, because we're nationwide," says Mike Sullivan, president of Southeast Sealing, an industrial flooring company with 30 employees, based in Conyers, Ga. "We've bumped our prices a little bit, but we can only go so high. It just makes us squeeze tighter and tighter."

Sullivan says higher interest rates have made some projects prohibitively expensive for some of his less established subcontractors. "A lot of businesses have only been around for the good times these past few years, and when they hit this bump in the road, they're gone," says Sullivan.


  Optimism has been waning nationally for some time. According to a survey issued in early July by the National Federation of Independent Business (NFIB), small-business owners are predicting slower sales, inventory growth, and hiring in coming months. NFIB's index of business optimism declined to 96.7 in June from 98.5 in May. The figure is based on a survey of 416 firms through June 30.

More companies are putting expansion on hold. The share of small businesses calling this a good time to expand dipped to 13% from 18%, according to the NFIB. Further, just a net 13% of firms expect higher sales ahead, down 7 percentage points from May.

Though some signs point to an economic slowdown, the hiring market is still going strong. The latest NFIB survey found that 25% of small companies reported unfilled job openings, and 12% of owners said finding qualified workers was their top problem.


  Not all industries are feeling the pinch. "The price of energy and things like that, they're in the back of my mind all the time," says David Demyan, a franchisee with Express Personnel, a staffing company in Boca Raton, Fla. "But we do best when the jobless rate is low, like it is now," he adds.

The decrease in overall optimism isn't a sea change, say some experts. Instead, they view it as an inevitable cooling of a sustained hot economy. "[Small-business owners] have been so optimistic for so long, there was nowhere else to go," says Holly Wade, policy analyst at NFIB.

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