The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index edged slightly higher from 87.5 in November to 88.0 in December. This more-or-less solidifies the sharp drop in November, which fell from 93.1 in October, and it reflects the degree to which small business owners remain pessimistic. Historically, index values over 100 signify a growing sector, and the current levels indicate a significant degree of weakness and anxiety. Indeed, these lower sentiment values were more than likely influenced by the post-election political environment and the debate over the fiscal cliff.
Small businesses are likely to bear the brunt of the higher marginal tax rates that were part of the fiscal cliff deal. It it should not be a surprise that taxes were listed as the top problem, cited by 23 percent of respondents. Other challenges were government regulations (21 percent) and poor sales (19 percent). With these in mind, the net percentage of small business owners with a positive outlook six months from now remained unchanged at -35, with economic uncertainties and political frustrations listed as the primary reasons.
Beyond these concerns, entrepreneurs are worried about weaker sales and earnings. While there were some improvements in the overall numbers, it is hard to put a positive spin on the sales and earnings numbers, with business owners anticipating reduced levels of both over the coming months. As a result, hiring and capital spending plans remain soft.
Overall, these numbers suggest continued weaknesses in the small business sector over the course of the next few months. While the fiscal cliff deal did avert the worst-case scenarios for the economy, it also raised marginal tax rates for many small firms and failed to address our long-term fiscal challenges. Smaller firms have tended to express more frustrations with the political process than others, and the NFIB Optimism Index is its second lowest reading in the last three years. Until business owners are able to express more confidence, I would expect them to continue to be more reticent about picking up their employment and investment spending.
Chad Moutray is the chief economist, National Association of Manufacturers.