Small Business Optimism is Down, but Sharp Upturn Expected

The NFIB’s latest report on small business sentiment is out.  The NFIB’s Optimism Index is one of the longest standing indices of small business sentiment, and so I tend to place a lot of weight on it.

It shows that conditions and sentiment are not a pretty sight among small businesses.

Although there have been some tiny signals — albeit weak signals — from other sources suggesting things may be looking up in the economy, you wouldn’t know it from looking at the NFIB report.  First of all, there’s this chart:

NFIB Small Business Optimism Index

Pathetic looking, isn’t it?  You don’t even have to know what the numbers stand for to know that’s a bad chart — the steep downward line speaks for itself.

Essentially, this chart is saying that the Small Business Optimism Index of the NFIB is near an all-time low – actually the second lowest reading in the 35 year history of the NFIB survey.  Only during the 1980-1982 recession was the index lower.

Remember, this is a group of small business owners reporting their sentiment — how they feel — about the economy. The survey was taken during March 2009 of 867 small business owners.

And how do they feel? Not so hot.

Employment among small business firms is down. profits are down, capital spending is down — well just about any number you look at is down. 

But there is a silver lining, according to William Dunkelberg, the chief economist of the NFIB.  He says that such a sharp downturn as we are in now, is leading to pent-up demand for spending.  That means we are likely to have a sharp upturn once the economy starts recovering, as he writes (emphasis added):

“Small business owners are clearly cutting costs at a very rapid pace (as are larger firms as well),  which primarily involves reducing employment. Cost cutting is likely being over-done since there is uncertainty about the future, in particular when the recession will end, and earnings are in the tank. What this portends, however, is a rapid improvement in employment and earnings once the economy establishes a forward momentum. Sharp recoveries are possible only after sharp declines. Capital spending and inventory investment are at or near record low levels and, more importantly, have remained their longer than during any recession in the 35 year NFIB survey history. This is feeding an ever enlarging pool of “pent-up demand”.  Consumers are accumulating a similar pool of unfilled spending needs as well. Car sales will not continue all year at the 9 million rate recorded at the start of 2009. More will be bought, not a return to 16 million, but a gain. Normally, well over a million new homes, apartments and condos are needed each year, but new construction is a third of that. More houses will be built. This will be the start of the private sector rescue of the economy. Some fiscal stimulus will start to filter in, but it will, as always, be late to the party. The “stimulus package” and the political urgency surrounding it was a smoke screen for other agendas.”

So there you have it from the NFIB Small Business Economic Trends report for April 2009 (PDF): not a pretty picture now, but once things start to recover — things could go up up up.

I agree with the assessment about a sharp recovery.  We’ve been affected by the non-stop media coverage about the economy and crises and bailouts — beating into our heads how bad things are — making a bad situation seem much worse.  Naturally people stopped spending, out of fear.  When you don’t spend in a consumer economy like ours, it becomes a self-fulfilling prophecy as demand drops. Then sales drop, then employment drops, and everything slows or declines like dominoes falling.  

It’s time to shake off this climate of fear and get on with the economic recovery.

What do you think? Is this Index an indication of how you feel?  Or do you feel more optimistic?

18 Comments ▼
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Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

18 Reactions

  1. If your goal is to grow your business, there are several ways to make sure you are getting the best bang for your marketing buck. Rather than trying to be known for everything you do for your customers focus your marketing using these steps:

    1. Pick a single topic – Yes, I know you’re expert at a lot of things. Even so, for a 90-day period, select a single topic to use as the foundation for your marketing activities.

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  2. Anita: “Journalistically” speaking, I am a pessimist regarding what’s going on in the world, but I am a philosophical optimist and I think these hard times will give rise to new and fresh alternatives. Today you will see plenty of protests and tea parties on Tax Day that could lead to something productive if people understand the fundamental meaning of the right to the fruits of your labor. I recommend you to check out this positive alternative on Tax Day: http://veethie.notlong.com

    It would be interesting to link the optimist index with the purchasing managers’ index. PMI has increased to a higher level compared with last month, but it is still a long way until it will reach the break-even level of 50. I wrote a post on this issue on Open Forum on April 10.

    Barkri: Great list of tips. Have you seen an increased amount of establishing small business incorporation at your firm?

  3. Interesting. It makes me think of an old saying, “On the heels of death, springs forth life.” Everything in life tends to follow certain cycles, including our economy. And naturally, when anything is in a sloping cycle, there’s only one place for it to go – and that is up.

    So its a given that we will recover from this recession eventually. My only concern is the cost that some are paying for it. Many of us stopped spending out of fear, but we have to take into consideration those that are left unemployed and that have lost their homes as a result of this. Once they even find jobs, it’ll take them quite some time to recover from their job loss experience, financialy and otherwise.

    Many will play “catchup” on their finances and it may be a year or more before their spending is up again and they’re on their feet on stable ground. Logically, we must account for a somewhat lengthy “recovery” period. It’ll be easier for those of us who still have our homes and jobs in tact right now to weather the storm. But for those of us that have been hit harder, recovering from job loss, foreclosures, bankruptcies, loss of savings and retirement funds and loss of healthcare coverage isn’t easy and takes time, years to recuperate from.

    I imagine how you look at it – depends on how you were affected by it. Either way, I wish good fortune and all the best to those that have suffered as a result of it. I hope that we all pull through sooner, rather than later.

  4. As a contractor/consultant, I’m seeing signs of recovery from clients and prospects. They are not spending for new hires, but they are spending to get work done, to boost sales, to get technology systems into better shape.

    Just yesterday, I had two small businesses tell me that in 60 days or less they planned to hire one new employee each. I realize that’s tiny, microscopic, but if many small businesses were able to hire that would have an effect. And within their logic to hire were statements about ignoring the mass media scare tactics and hysterics.

  5. TJ, that is excellent news and you’re right, if many small businesses were able to hire – the positive affect would accumulate rapidly. Hopefully, others can do the same so that we can all get on our feet a little bit faster.

    As for the news and media . . . I don’t watch it in my home. I have a choice – I can sit through an hour of pleasant entertainment or educational programming – or I can sit through an hour of complete negativity and overwhelmingly bad news. And that’s not just with the economy, its everything on the news.

  6. I agree that a significant recovery will take time but small baby steps will get us there. I’m confident of that. That graphic chart is horrible to look at but it’s the reality of the situation. We’ve all spent the last year in fear of our personal and business stability. So it would make sense that the data looks just as bad as our fears have been. It’s hard to be optimistic when the reality is less than positive.

  7. Geez, I was aware that optimism was down but wow that’s quite a drop. I think we are already seeing some improvements slowly. We have a long way to climb back up but we’ll be proud when we do.

  8. Yes its going to get a lot worse and many more businesses will go bankrupt.

    But I’m not going to wait for my industry to turn the corner, I’m starting a new business based on the growing trend of gardening.

    This is not a time to wait it out because the wait could be 5-10 years. This is a time to go after new opportunities.

  9. That is a bad looking graph. I am not sure if it could even go much lower. I would have to assume an upturn is expected.

  10. This suggests that once things bottom out that we’ll see a V shaped recovery. I don’t know too many people that really think that that’s in the cards. While I do believe we’re bottoming and the worst is over, most of my clients and others that I talk to think that recovery will be very slow. I’m recommending that my clients prepare for a “new normal”, with revenues around where they’re settling out to for the foreseeable future, and aligning costs to those revenues. Things will improve, but I suspect it will be a while before we see a return to anything approaching previous revenue levels for many small businesses. I wish i could be more optimistic.

  11. Oh Oh, I belong to this chart too Anita. However, Curt is right. We shouldn’t wait for our business to go to that down corner. We must learn to see the positive side even with just the slightest and fewest number of rays of hope, we must hold on to that.

  12. Anita you are spot on with your reporting and conclusions. The optimism index as you report it, is an ex-post point of view. By that, I mean individual remarks are a function of prior period results. Many years ago, (more than I care to admit), I was graded on my ability to model housing starts as a countercyclical function of economic expansion. The short strokes are an ARIMA model with a PDL=3 captured the spending habits of individuals looking to invest. The take away then (and I submit remain current), is that rational people are going to sit on the sidelines for up to 270 days (3 qtrs), BEFORE they trust reported economic activity and thus “dive back in”.

  13. I do believe that we’re moving towards recovery.

    In support of that message, I was at a Sales Training session yesterday and the speaker noted that we have slowed down our rate of buying cars to 1 new car every 33 years (year-to-date 2009). All of us in the meeting agreed that no one was going to wait 33 years to replace their car (most cars wouldn’t be running after 33 years) – so there is a lot of pent up demand building. If, for example, the automotive manufacturers could just figure out how to deliver what customers want in a more timely and cost effective manner – they’d get themselves out of the hole.

  14. 33 years life value of car? Lol!

    Yes, I think I must also be optimistic enough that we are heading towards recovery.

  15. While it is comforting to think about the upturn and the benefits small businesses will reap from that, it is very clear that small businesses need help right now. Small businesses are the backbone of our economy, yet our government is doing little to empower this strength in our free market. Small businesses face many more challenges than their larger counterparts, yet instead of being helped in their endeavors, our government policies often hinder them. For instance, small businesses are discriminated against in purchasing health insurance. Not only do they typically have to pay higher premiums, but they are not allowed to band together and purchase health insurance over state lines as big businesses and labor unions are able to do. At the Family Policy Center with the National Center for Policy Analysis, we believe that small businesses need less government intervention and more freedom! In this way they will be able to better innovate, grow their businesses and create jobs, thereby helping to pull us out of this recession.

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