Small Business Capital Spending Remains Weak

Capital expenditures – purchases of assets that will benefit a company for at least one year – dropped dramatically during the Great Recession. Federal Reserve data show that capital spending of non-financial companies declined by 35 percent between 2007 and 2009, when measured in inflation-adjusted terms.

Capital spending has recovered, but the level in 2012 remained 11 percent below that in 2007, when assessed in real terms.

Sluggish investment by small business is at least partially responsible. The latest Wells Fargo/Gallup Small Business Index, a quarterly survey of approximately 600 U.S. small business owners, shows that the fraction of small business owners planning to increase capital spending over the next 12 months remains weak by historical standards. While more small business owners were planning to increase capital spending than decrease it in every quarter between 2003 and 2008, the fraction of owners planning to increase and decrease capital spending has been roughly equal since the end of the Great Recession, the survey reveals.

The National Federation of Independent Business’s (NFIB) monthly small business survey shows similar patterns. In July 2013, 23 percent of owners planned to make a capital expenditure in the next three to six months, four percentage points below the fraction that planned to make a capital investment in July 2007.

Actual spending patterns remain equally weak. According to the third quarter 2013 Gallup/Wells Fargo Small Business Index, more small business owners reported that they had decreased capital spending over the previous 12 months than increased it, a pattern that has prevailed since mid-2008. Fifty-four percent of the small business members of the NFIB reported in July that they had made at least one capital expenditure in the previous six months, less than the in 58 percent that reported a capital purchase in July 2007.

While the data are spotty, small business’s capital spending plans appear weaker than those of big business. In the first quarter of 2013 – the latest period for which big and small company data are available – 38 percent of the chief executives of major corporations surveyed by the Business Roundtable said they expected to increase capital spending over the next six months. By contrast, only 22 percent of small business owners told surveyors from Wells Fargo/ Gallup that they planned to increase capital spending over the next 12 months, when contacted at a similar time.

One reason for weak small business capital spending during the current economic expansion has been the continued poor financial position of many small companies. The fraction of businesses that reported having increased capital spending in the Gallup/Wells Fargo Small Business Index quarterly survey correlates 0.92 with the fraction that reported good or very good cash flow, and correlates 0.93 with the fraction reporting good or very good financial situation, over the 40 quarters between third quarter of 2003 and the third quarter of 2013. Because a lesser fraction of small businesses has been strong financially since the Great Recession began, a lesser fraction of small businesses has had the money to make capital investments, contributing to subdued capital expenditure levels.

Getting the share of small businesses in a good financial position back to pre-recession levels may be necessary to return overall capital spending to 2007 levels.

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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.