The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index dropped sharply from 93.1 in October to 87.5 in November. This is the lowest level since March 2010, erasing the steady gains that we have seen in the past 2½ years.

NFIB also said that it was “one of the largest declines in survey history.” While some of the effects of Hurricane Sandy were “apparent,” according to NFIB, the major contributing factor was the outcome of the election and worries about the probable fiscal cliff. Of those suggesting that now was not a “good time to expand,” the top reasons cited were the economy and the political climate.

Respondents were asked about their outlook for general business conditions six months from now. The net percentage of small business owners with a positive outlook plummeted from +2 in October to -35 in November. The shift of 37 percentage points in the outlook was both dramatic and troubling. (To put it in perspective, the low point during the Great Recession was -23 in March 2008.) Clearly, smaller firms are frustrated, with uncertainties about the future direction of the economy paramount in their minds. These findings can be seen in diminished expectations for sales, earnings, inventories, and capital spending.

Perhaps surprisingly given these results, the employment variables appear to be less impacted by the more-negative feelings. Small business employment growth remains quite anemic, with net hiring in November turning negative (down from +1 to -1 for the month). But, the net percentage of firms with job openings and with hiring plans for the next three months actually edged higher in November (each by one percentage point). While this still indicates sluggish hiring plans moving forward, employment is notable in that it did not fall like many of the other indicators.

The most important problem for small business owners was a tie between taxes and poor sales, with each getting 23 percent of the responses. Government regulations and red tape received 18 percent. The inability of political leaders to solve the fiscal cliff is more than likely a major factor in both rising uncertainties regarding the future as well as the fact that “taxes” continue to be cited as one of the more pressing concerns.

Overall, small business owners are very anxious right now. They are worried about slower economic growth, poor sales, and the prospect of higher taxes. These findings mirrored the drop in confidence seen in last week’s NAM/IndustryWeek Survey of Manufacturers, which observed a similarly sharp drop in optimism. Until policymakers are able to avert the fiscal cliff and address the nation’s long-term financial challenges, these headwinds are likely to be exacerbated and small firms and manufacturers will remain uncertain about the economic environment. To the extent that these anxieties lead to real reduced consumer spending, business investment, and hiring, these are not good signs.

Chad Moutray is chief economist, National Association of Manufacturers.

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