The National Federation of Independent Business (NFIB) said that small business confidence fell sharply in February to its lowest level in 11 months. The Small Business Optimism Index declined from 94.1 in January to 91.4 in February, essentially erasing the gains in sentiment that we have seen since the end of the government shutdown in October.
As such, this data continue to show that small business owners remain anxious about the economy even as there are signs of progress. Note that the NAM/IndustryWeek Survey of Manufacturers also found that smaller firms were less confident than their larger counterparts, especially in terms of expectations for sales, hiring, and capital expenditure plans.
In the NFIB survey, the percentage of firms saying that the next three months were a “good time to expand” has dropped from 10 percent in December to 8 percent in January to 6 percent in February. Of those saying that it was not the right time for expansion, the economy was the primary reason. Meanwhile, the “single most important problem” was government regulations, with 21 percent of respondents noting “red tape” as a top challenge. This was followed by taxes (19 percent), poor sales (16 percent), and the quality of labor (11 percent).
Much of the underlying data echoed the uncertainty seen in the headline figures. For instance, the pace of hiring appeared to have slowed in the month, with the net percentage of small firms planning to add workers in the next three months decreasing from 12 percent to 7 percent. Net sales expectations were also down significantly from 15 percent to 3 percent, with continued weakness in earnings and inventories. Still, it is perhaps worth mentioning that actual net job growth was unchanged at 2 percent, and on the positive side, capital expenditure plans rose from 24 percent to 25 percent.
It is hard to paint this report in a positive light. Perhaps there was a weather impact that dampened demand and sentiment, and if that is the case, we would expect the Optimism Index to rise next month. Yet, it remains clear that small business owners remain uncertain about the economy and about possible government regulations, something that has lessened overall confidence in February.
Chad Moutray is the chief economist, National Association of Manufacturers.