Uncertainty hurting small businesses and the broader economy

The National Federation of Independent Business press release today paints an ominous picture: Hiring Plans Plunge: Small Business Optimism Drops 0.1, Expectations for the Future Remain Low

From the release:

September was another month of low expectations and pessimism for the small-business community, with the NFIB Small Business Optimism Index losing 0.1 points and falling to 92.8. The recession-level reading was pulled down by a deterioration in labor market indicators, with job creation plans plunging 6 points, job openings falling one point and more firms reporting decreases in employment than those reporting increases in employment. Since the commencement of NFIB’s monthly surveys in 1986, the Index has been below 93.0 a total of 56 times; 32 of which have occurred since the recovery began in June 2009.

“The election is just weeks away and essentially a horse-race, and its outcomes would have vastly divergent policy implications,” said NFIB chief economist William Dunkelberg. “Everyone is waiting to see what happens, especially small-business owners who have a lot at stake in the outcome—which could mean higher marginal tax rates and more deficits, OR lower marginal tax rates and less government. Small-business owners are reporting that the political climate is a reason not to expand—second only to the economy, which is only keeping up with population growth. And so, in the meantime, owners are in maintenance mode; spending only where necessary and not hiring, expanding or ordering more inventories until the future becomes more ‘certain.’”

A few comments:

1. This is based on a random sample of 691 NFIB members. Like all surveys and polls, it has some margin of error.

The data is very noisy month to month, and it’s worth noting some positive longterm trends. A year ago, 28% of small businesses reported Poor Sales as their single most important problem, but that fell to 21% in September. That 21% matched two other categories that rose from last year: Taxes and Government Requirements & Red Tape. (As I’ve noted here before, the small businesses I write about are much more concerned with local and state red tape than federal.) As the economy improves, we should see Poor Sales fall even lower on that list.

Likewise, the percentage of small businesses with open positions (17%) is down from its recent peak in May (20%), but it’s still the highest September level since 2008.

2. This report could be read as confirmation of an August prediction from Rajeev Dhawan at the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business: “Anticipation Effect” to Stall Economic Growth Into 2013

3. I have to take issue with one particular phrase in the press release from the NFIB’s chief economist Dunkelberg, with its clear political posturing: “Everyone is waiting to see what happens, especially small-business owners who have a lot at stake in the outcome—which could mean higher marginal tax rates and more deficits [Obama], OR lower marginal tax rates and less government [Romney].”

There’s obviously a great deal of uncertainty right now: the election, the looming “fiscal cliff” of expiring tax cuts and mandated spending cuts, the simmering economic crisis in Europe, concerns about growth in China, and continued turmoil in the Middle East.

But Dunkelberg has created a false dichotomy here. If our dominant concern is deficits and the debt, then we might want to plunge over that so-called “cliff.” If the Bush and Obama tax cuts expire and if we slash spending, we will run the risk of a fresh recession but we will also immediately begin reducing the debt as a percentage of GDP. (Click here to see a graph.)

Conversely, lower marginal tax rates will not adequately address the deficit. Lower taxes are stimulative, but it’s a mistake to say that they will pay for themselves through increased economic activity. We’ve been engaging in massive tax cuts over the last 11 years, and while those have undoubtedly boosted consumer activity, they certainly haven’t juiced our economy enough to pay for themselves.

And as for Dunkelberg’s comment about “less government”: have I missed something? Governor Romney has lately been sounding especially hawkish about building up the military, and he has seemed to back way off of plans to cut Medicare spending. And Social Security hasn’t been debated substantively in this election as it should be. I’m not sure how all this adds up to “less government”, since taking those three budget lines off the table will require increased revenue even if we slash spending elsewhere. If Dunkelberg is simply referring to the likelihood that a Republican administration might marginally cut some federal regulations regarding the environment and the like, he should just say that.


  1. View from Brookhaven says:

    Re: #3

    You’re spot on. The NFIB wants to be seen as non-partisan so they’ll be taken seriously, but it’s hard to do so when they blatantly ignore reality and recite talking points.

  2. John Konop says:

    I got this e-mail today and it is was from Fox Business News……….

    ……My own research has found good news for small business owners. The Biz2Credit Small Business Lending Index for September 2012 indicates that big banks have started lending to small companies at a higher frequency as of late. Last month, big banks (categorized as having $10 billion or more in assets) approved 14.2% of small business loan requests, up strikingly from 10.9% in August. Notably, CitiBank, which had adhered to strict lending criteria for small businesses since the credit crunch began in late 2008, has begun to grant an increasing amount of funding requests. Other large banks, including Citizens Bank and Sovereign, have also become increasingly aggressive in the small business lending space.
    Why is this good news?

    It has been well documented that small businesses create the lion’s share of new jobs in the U.S. economy. Access to capital is key for entrepreneurs seeking to launch a new venture, as well as for small business owners looking to expand their companies. Expansion translates into more business and thus creates more jobs.

    Better than anyplace in the world, the U.S. fosters entrepreneurship and encourages the creation of startups. These small companies grow into larger enterprises and some of them eventually become large corporations. Every global firm at one time was a startup.

    While I won’t go as far as to say that the economy has turned the tide and there are calm waters ahead, I am encouraged by what I am hearing from the banks and from small business owners. After hunkering down for a long time, the banks realize that they will only begin to make money if they continue to do deals. Small businesses can grow only when they have the capital available to do so.

    This opinion column was written by Rohit Arora, co-founder and CEO of Biz2Credit, an online resource that connects small business owners with 1,100+ lenders, credit rating agencies, and service providers such as CPAs and attorneys via its Internet platform. Since 2007, Biz2Credit has secured more than $600 million in funding for thousands of small businesses across the U.S…….


    • Bill Dawers says:

      Certainly, here in Savannah, we are seeing a surge of private investment throughout the downtown area. It’s really quite impressive — and clearly indicates renewed and growing access to credit.

      Thanks for the link.

    • Bill Dawers says:

      I agree.

      We have to bring some compromise back into our national politics. There are many ways of addressing our fiscal problems, any number of which could set the stage for a stronger recovery by reducing uncertainty and ensuring sustainability for a decade or two, at least.

      Personally, I liked the grand bargain that Obama and Boehner seemed nearly to have, as a really good starting point. But there are lots of other variations that would work.

      • rrrrr says:

        Some “Compromisers” as of late seem to have confused the definition of compromise and its function in government with that of appeasement…

  3. benevolus says:

    Sure, we could stimulate the economy again, just like we have before, and we would crash again just like we have before. We are going through a pretty substantial reset of our economy I think. We are having to compete with low cost China and India instead of Germany and Japan. Our standard of living is going to drop.

    • saltycracker says:

      Disagree – the inaction and chicken game our legislators are playing with the complex tax system and medical care is dragging us down.

      Darden just announced more part time restaurant employees and defense contractors want to lay off tens of thousands. they have the tax laws coming in Jan 1 to plan on.
      Democrats scream we must wait until after the election as the law might change. Insane.
      That is indecision.

      There are many excellent steps (see link above) to change the tax laws without cutting revenue. Do it and watch the largest economy in the world get going.

  4. elfiii says:

    I’m a small business owner and have two partners. We need two new employees desperately. That being said all three of us have agreed we don’t hire anybody until well after the election for exactly the reasons stated by the NFIB report.

    We didn’t wait for NFIB to tell us the reason we aren’t going to hire. We already figured that out without consulting the NFIB.

    It may be anecdotal evidence on our part but all the other small businesses that are our customers and vendors are saying the same thing. The emperor (government and the economy) has no clothes and we have no confidence in him.

    • benevolus says:

      I don’t understand this. I am a small business owner too, and if my business justified it, I would hire someone in a heartbeat. Hiring someone is not that risky if you need them desperately.

      Moving into a bigger building is pretty expensive and risky if the business doesn’t justify it, but if small businesses are thinking the election is going to change that then I would question their judgment. I mean, we are always waiting to see what happens next, not just at election time. If Obama gets re-elected, we can probably expect similar conditions- slow growth. If Romney gets elected, perhaps we could expect slightly faster growth, but I doubt it. And even if there was faster growth, how much are you willing to risk to take advantage of it? Do you want to grow 20% just to have to downsize in 2 years?

      However, if by “after the election” you mean “after the fiscal cliff issue is resolved” then I agree with you. We’re all waiting to see how that works out.

  5. Ken says:

    External threats that could increase risk or decrease profit are real. Individual owners can’t control those and are limited in how they mitigate damages.

    When the source of those threats is from the federal government then lowered investments logically follow. It appears lending institutions would rather face a stable, known drain on profits (inflation) than face a volatile, unknown drain on profits (the federal government’s upcoming regulations and tax structure).

  6. cheapseats says:

    “Conversely, lower marginal tax rates will not adequately address the deficit. Lower taxes are stimulative, but it’s a mistake to say that they will pay for themselves through increased economic activity. We’ve been engaging in massive tax cuts over the last 11 years, and while those have undoubtedly boosted consumer activity, they certainly haven’t juiced our economy enough to pay for themselves.”

    Yes, this ^^ says it succinctly.
    I should add, as a small business owner, that the NFIB is bull of feans – whatever they say, I usually go with the opposite. (Full disclosure: I was a dues-paying member of the NFIB for many years until they became an operative for the Republican Party.)

  7. saltycracker says:

    Tuning this around involves not just lowing the rates but broadening the base by fixing the tax code.

    From my above link to the Fortune article:

    Taxes: The Harvard Business School, as part of its U.S. Competitiveness Project, recently conducted a first-ever survey of its alumni worldwide. Nearly 10,000 responded, and they were blisteringly clear about the worst part of doing business in America vs. other countries: “Complexity of tax code” was their top choice. And when they were asked how 17 competitiveness factors were changing in the U.S., the tax code ranked dead last on getting better.

    Our tax code is dragging the nation down. Here’s how to stop the damage.

    Our mantra is “Broaden the base and lower the rates.” Broadening the base means getting rid of the endless special breaks—the targeted deductions, credits, exclusions, and other features — that have accumulated on the tax code like barnacles on a boat. They’re a main reason the tax code is so staggeringly complex, longer than War and Peace, and impossible for anyone to comprehend fully.

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