A Tale of Two Recoveries

Small business owners are reporting a bleaker view of their finances and the direction of the economy than they were at the start of the year, according to three surveys released this month.

While small business sentiment had registered broadly improvement during the second half of 2010, the most recent polls of business owners by Wells Fargo/Gallup, Discover/Rasmussen, and the National Federation of Independent Business show that expectations for recovery have deteriorated.

Optimism appears to be faltering among small business executives, even as their counterparts at larger companies expect conditions to improve. The dim assessment shows how severely small businesses' finances remain damaged by the recession nearly two years after it technically ended in June 2009. Their hopes for a robust recovery seem to be fading.

"It's going to take a few years to get back to normal," says Marc Bernstein, head of Wells Fargo's (WFC) small business segment. In one indication he cites, demand for loans "is nowhere near where it would be in a normal recovery."

"Zero" Expectations in Gallup Survey

The bank's quarterly survey, conducted by Gallup and based on interviews with 602 small business owners, showed that they rated their current finances somewhat worse in April than they did three months ago. Owners' expectations for the year ahead dropped more steeply. Overall, the index score of 0 represents a neutral outlook, down from 12 last quarter. The measure had been below 0—indicating a negative outlook—for all of 2009 and 2010.

Rising food and gas prices and concern over government budget deficits may be making business owners jittery, says Dane Stangler, director of research at the Kauffman Foundation, which promotes entrepreneurship. "The uncertainty issue has sort of returned," he says.

Even if federal and state budget gaps don't affect businesses directly, the flood of news about fiscal problems can dampen business owners' perception of the economy, says William Dunkelberg, chief economist at the National Federation of Independent Business.

The NFIB's Optimism Index, based on 811 responses in a survey of members, slipped by 3 percent, to 91.9, in April—the lowest level since October. The drop was driven by the survey's "soft" questions about what business owners expect in sales and business conditions in the next six months, rather than by questions regarding their actual hiring or spending.

Perceptions Affect Realities

Small business owners aren't necessarily accurate forecasters, so their negative outlook may not be justified. Still, their perceptions of future growth have real consequences for today's economy, says Dunkelberg: "If that's the expectation for tomorrow, then today they don't order any inventory or hire the worker."

The NFIB considers optimism to remain at "recession levels." Companies listed "poor sales" as their most important problem, an issue that has consistently scored highest since the recession struck.

The Discover survey, conducted by Rasmussen Reports, polls 750 businesses that have fewer than five employees. Some 54 percent of respondents to the latest survey said the economy is getting worse, up sharply from 41 percent the previous month. Gas prices were a big negative for these companies as well, with three out of four reporting that higher fuel costs were damaging their profitability.

Executives at larger companies have a cheerier outlook. A Deloitte survey of 527 executives at U.S. companies with $50 million to $1 billion in revenue found that four of five expect sales to rise in the year ahead. A survey of top public company chief executive officers by Business Roundtable also showed an improving outlook in the first quarter.