Reality is Weighing on Small Business Optimism

business optimism

Small business owners are an optimistic lot, with studies showing that they tend to have a rosier outlook than other people. Yet four years into the economic recovery, surveys show them in a relative funk.

What gives?

It’s pretty simply, really. Small business owners’ relative pessimism reflects reality. Despite an economy that has been expanding since mid-2009, conditions remain relatively poor for the typical small business owner.

Let’s start with small business owners’ attitudes. The most recent Wells Fargo Small Business Index clocked in at 16 in April. While that’s higher than the -1 it recorded in the second quarter of 2009, when the economy was pulling out of the worst economic downturn since the Great Depression, the Index remains far below the 99 it recorded in the fourth quarter of 2007 before the Great Recession began.

Other indices are also below their pre-recession levels. The longest running measure – the Small Business Optimism Index from the National Federation of Independent Business – was at 97.3 in March of 2007. In March of 2013, it was at 89.5.

As much as small business owners try to see the bright side, many measures show that small business owners are worse off today than they were at the end of 2007. Consider the following:

  • Fewer small businesses are doing well financially. Approximately, 58 percent of small business owners told surveyors from Wells Fargo that their company’s financial situation was “good” in April. While that’s better than the 50 percent who said it was good in the first quarter of 2009 when the economy was still in recession, it is lower than the 72 percent who reported it as good in the fourth quarter of 2007 before the economic downturn hit.
  • Small business owners face concerns about their cash flow. Fifty-nine percent of small business owners told interviewers from the American Express Open Small Business Monitor that they had cash flow concerns, ten percentage points higher than the 49 percent who described having cash flow problems in September 2007.
  • Revenues remain soft. In April only 37 percent of small business owners told Wells Fargo’s surveyors that their business’s revenue rose of the prior 12 months. In the first quarter of 2007, 45 percent of small business owners said their revenue had gone up over the previous 12 months.
  • Employment is down. In April the Intuit Small Business Employment Index was 4.9 percent below its December 2007 level, indicating over 1 million fewer people employed by companies with fewer than 20 workers now than before the Great Recession.
  • Households hold less equity in private companies. Data from the Federal Reserve of New York’s Quarterly Report on Household Credit shows that in the fourth quarter of 2007 households held 17 percent less equity in non-corporate businesses than they did in the fourth quarter of 2007.
  • Fewer Americans are in business for themselves. According to Bureau of Labor Statistics data, the percentage of the civilian non-institutionalized population that was self-employed dropped from 7.0 percent in March 2007 to 5.9 percent in March 2013.

Given the numbers, I am surprised at how positive the small business confidence measures are. It’s testimony to the optimistic nature of small business owners that their views are this upbeat.

Reality Check Photo via Shutterstock

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.