Small Business Optimism Down, Signals Economic Slowdown

The numbers are out for the August 2006 Small Business Optimism Index. They signal a slowing economy.

The Optimism Index score dropped two points to 95.9 (1986 = 100), the lowest reading since March, 2003.

What this means is that U.S. small business owners have less confidence in the economy, something that likely is a sign of slower economic growth in 2007.

The National Federation of Independent Business (NFIB) calculates the Optimism Index every month, based on a survey of U.S. small business owners. While a drop one month to the next month may not be much to worry about, here the Optimism Index has been dropping since late 2004, as this chart shows:

Small Business Optimism Index

Of course, the good news is that the Index was at record highs in 2004, so there was plenty of room to drop. Yet, the latest score for August definitely signals a chilling economy.

A lot of data goes into calculating the Index score, including plans for capital expenditures, availability of credit, inventory levels, sales growth, and profitability measurements.

Among all the data, two points stand out:

(1) Employment – Plans to hire remain strong. Yet, small business employers are having trouble filling positions — it is a tight labor market. Of the owners who hired or tried to hire recently, a whopping 84% reported few or no qualified applicants. With the hiring market that tight, it means small businesses are competing for talent and can expect to pay more in salaries and benefits. For staffing firms and employees looking for work: it’s an employee’s market.

(2) Credit – Credit is becoming more expensive. On the one hand, it still is not that difficult to get credit (just think of all the credit card and loan offers being mailed to us weekly). But small business owners report that interest rates on short term loans are higher than at any time in the past ten years. For financial institutions: this could be an opening to woo over small business owners, with attractive credit offerings their current institutions may not make available.

Download the full Small Business Economic Trends Report (PDF).

Anita Campbell Anita Campbell is the Founder, CEO 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.