Small business optimism plunges

The November report of the National Federation of Independent Business was downright gloomy. I'm feeling gloomy as well, since it's very hard to get optimistic about the future, even if Congress somehow manages to find a compromise to avoid going over the "fiscal cliff." No matter what happens in the next several weeks, it's rational to expect tax burdens, regulatory burdens, and healthcare costs to rise over the next year or so. Entitlement programs, from food stamps to disability to social security and medicare, are going to be consuming an impossible share of our national income within my lifetime unless drastic changes are implemented soon. Yet very few in Washington seem to want to do anything about this, our biggest national problem.

The chart above shows the overall results of the latest survey of small businesses: the Small Business Optimism Index. It fell significantly in November, and is about as weak as it has ever been.

This is a big deal, since small businesses are critically important to the health of the U.S. economy. The Small Business Administration has the relevant stats:

Small businesses make up:
     99.7 percent of U.S. employer firms,
     64 percent of net new private-sector jobs,
     49.2 percent of private-sector employment,
     42.9 percent of private-sector payroll,
     46 percent of private-sector output,
     43 percent of high-tech employment,
     98 percent of firms exporting goods, and
     33 percent of exporting value.

The weakest part of the survey is shown above. As the NFIB reports, "The net percent of owners expecting better business conditions in six months fell 37 points to a net negative 35 percent." This is worse even than in depths of the 2008-2009 Great Recession. Small business owners overwhelming expect business conditions to deteriorate next year.

As the chart above shows, only 5% of small business owners plan to increase hiring. This is up from the Great Recession low, but still substantially below normal levels.

This sums it up:

Something bad happened in November—and based on the NFIB survey data, it wasn’t merely Hurricane Sandy. The storm had a significant impact on the economy, no doubt, but it is very clear that a stunning number of owners who expect worse business conditions in six months had far more to do with the decline in small-business confidence. Nearly half of owners are now certain that things will be worse next year than they are now. Washington does not have the needs of small business in mind. Between the looming ‘fiscal cliff,’ the promise of higher healthcare costs and the endless onslaught of new regulations, owners have found themselves in a state of pessimism.

The only good thing that can be said about all this gloom and doom is that the stock market is undoubtedly suffused with similar gloomy sentiments. Markets are braced for lots of bad news, so if the future turns out to be even slightly less bad than expected, risk asset prices can rise.