Small-business confidence in U.S. increased in May

Small-business confidence in U.S. increased in May

The measure is still lower than levels reached in past economic rebounds.

June 9, 2010

Confidence among U.S. small businesses rose in May to the highest level since September 2008 as executives became more upbeat about the economy six months from now, a private survey found.

The National Federation of Independent Business’s optimism index increased to 92.2 last month from 90.6 in April, the Washington-based group said yesterday. Seven of the index’s 10 components increased, and three declined.

The measure is still lower than levels reached in past economic rebounds, indicating the recovery will take time to gain strength. The report shows that while smaller firms are beginning to benefit from the expansion, they’re trailing larger companies such as General Electric.

“Small businesses have lagged the jobs recovery and the economic recovery and are likely to do so,” says John Herrmann, senior macro strategist at State Street Global Markets in Boston. “We’re seeing the slightest of indications that business hiring and risk-taking in the form of expansion and business formations may be taking place.”

The small-business optimism gauge has recovered more slowly than measures such as the Institute for Supply Management’s manufacturing index that capture activity among companies of all sizes. GE Chief Executive Officer Jeffrey Immelt said May 24 that the U.S. economy is “very good and improving.”

The ISM factory gauge has increased 27.2 points since reaching a low in December 2008. The small-business gauge has gained 11.2 points since its nadir.

Obama’s Policies

The difference hasn’t gone unnoticed at the NFIB, which has been critical of the Obama administration’s policies. Obama’s health-care reform has hampered investment, hiring and small business expansion plans, while government aid for small companies has been minimal, the group says.

“We’d like to see some certainty, and certainly Washington has generated huge amounts of uncertainty,” William Dunkelberg, the group’s chief economist, said in an interview with Bloomberg Radio. “The basic problem is the consumer and housing usually lead the economy out of recession. That’s not happening.”

An 8-point gain in the gauge of expectations for business conditions six months from now accounted for the biggest share of the increase in the overall index, today’s report showed. The report also showed companies are ready to step up hiring and capital spending, even as those gauges remained at “recession” levels, the statement said.

Time to Expand

A gauge of whether firms think this is a good time to expand rose 1 point to a net 5 percent. The survey’s net figures are calculated by subtracting the percent of business owners giving a negative answer from those giving a positive response.

“The small business sector is in maintenance mode, not growth, but it has definitely lifted off the bottom,” Dunkelberg said in a statement.

A net 1 percent of respondents plan to hire over the next three months, up two points from April. Nine percent of firms say they currently had job openings that were hard to fill, compared with 11 percent a month earlier.

Plans for capital investment rose one point to a net 20 percent, matching the highest level since November 2008.

A measure of profit trends rose 3 points to a minus 28 percent, 24 points below the best expansion reading, which was reached in 2005.

Top Concern

Thirty percent of respondents cited “poor sales” as their top business concern, up 1 point from April. A net negative 12 percent of business owners expected credit conditions to ease, a 3 point improvement.

A net 2 percent of firms plan to add to inventories, the first positive reading since November 2007 and up 4 points from April. A net zero percent, down 1 point, reported inventories as too low.

The NFIB report was based on 823 survey responses through May 31. Small businesses represent more than 99 percent of all U.S. employers and have created 64 percent of all new jobs in the past 15 years, according to the U.S. Small Business Administration. A small business is defined as an independent enterprise employing up to 250 people.