Economic Activity ‘Mediocre at Best,’ Recent Report Says

Economist says in report that pent-up demand should be 'immense,' but it's not.

Small business owners are not reaping the benefits of the expected economic turnaround, according to a new report released today. The study shows that small businesses are not creating new jobs and capital spending has not markedly improved. On the good news front, the survey indicates there is a slight uptick in the number of small business owners who expect business conditions to improve in the next six months.

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The report by The National Federation of Independent Business Index of Small Business Optimism gained 1.6 points in May with a reading of 92.2. Although not a strong sign of recovery, it is headed in the right direction, the group said. It still is the best reading since September 2008’s 92.9 index that occurred just before the five-point decline in October that started the rapid deterioration in the fourth quarter of 2008. In May, seven of the 10 index components rose, but job creation and capital expenditure plans barely gained and remained at recessionary levels.

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“The performance of the economy is mediocre at best,” said William C. Dunkelberg, NFIB’s chief economist. “Given the extent of the decline over the past two years, pent up demand should be immense, but it is not triggering a rapid pickup in economic activity.”

During May, firms still shed workers, with the average change in employment per firm (including those with steady employment) at negative .5 workers, worse than the prior three months.  The small business sector is not contributing to private sector employment growth. Over the next three months, 7 percent plan to reduce employment (unchanged), and 14 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, two points better than the April reading and positive for the first time in 19 months.

The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, two points above the 35-year record low reached most recently in December 2009. 

A net 8 percent expect business conditions to improve over the next six months, up eight points from April and 16 points from March, a good sign, but still a low reading.  
“Compared to past recoveries, it is clear that the current economic recovery has not impacted the expectations of small business owners.  They do not trust the economic policies in place or proposed and are distressed by global and national developments that make the future more uncertain,” Dunkelberg said.

The May reading indicates that more firms are still experiencing weakening sales trends than are enjoying sales improvements. Unadjusted, 23 percent of all owners reported higher sales (last three months compared to prior three months, up six points) while 38 percent reported lower sales (down three points).  

“The numbers are looking a lot better, but still are negative and are clearly worse than the 1983 recovery period,” Dunkelberg said.



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