Monday, August 2, 2010

Small Business Sentiment Hits Recorrd Low

from Gallup:

PRINCETON, NJ -- The Wells Fargo/Gallup Small Business Index -- which measures small-business owners' perceptions of six measures of their current operating environment and future expectations -- fell 17 points to -28 in July. This is its lowest level since the index's inception in August 2003. (See full index results on page 2.)

August 2003-July 2010 Trend: Wells Fargo/Gallup Small Business Index
Record Pessimism in Future Expectations
Most of the decline in the overall index came in the Future Expectations Dimension of the index, which measures small-business owners' expectations for their companies' revenues, cash flows, capital spending, number of new jobs, and ease of obtaining credit. The dimension fell 13 points in July to -2 -- the first time in the index's history that future expectations of small-business owners have turned negative, suggesting owners have become slightly pessimistic as a group about their operating environment in the next 12 months.
August 2003-July 2010 Trend: Wells Fargo/Gallup Small Business Index -- Future Expectations Dimension
Small-business owners' future expectations for their operating environment show significant declines in their revenue, cash-flow, capital-spending, and hiring expectations for the next 12 months. Forty-two percent expect it to be "somewhat" or "very difficult" to obtain credit -- no improvement from April and January. One in five (22%) small-business owners expect their companies' financial situations a year from now to be "somewhat" or "very bad."
More Negativity About Present Situation
The Present Situation Dimension of the index declined by a more moderate four points to -26 in July -- the second-lowest rating for this dimension that hit its low of -29 in January 2010.
August 2003-July 2010 Trend: Wells Fargo/Gallup Small Business Index -- Present Situation Dimension
When evaluating the past 12 months, small-business owners suggest there has been a modest further decline in their current operating environment, driven largely by a significant decline in the percentage of companies having good cash flows. (See full index results on page 2.)
Implications
The sharp deterioration in small-business owners' economic perceptions and expectations in July is fully consistent with Gallup's tracking of a steady decline in consumer confidence over the past three months. So is the weaker-than-expected growth of the U.S. economy during the second quarter, as well as the general expectation of a further slowing of the economy during the second half of 2010.
The Wells Fargo/Gallup Small Business Index seems to be something of a precursor of future economy activity. It peaked at the end of 2006; matched that peak once more in June 2007; consistently declined thereafter as the recession deepened, before bottoming out in mid-2009; and finally, improved modestly until its July 2010 decline.
Small-business owners are the embodiment of America's entrepreneurial and optimistic spirit. As a result, their increasing concerns about their companies' future operating environment do not bode well for the economy in the months ahead. Nor do small-business owners' intentions to reduce capital spending and hiring: 17% of owners plan to increase capital spending in the next 12 months -- down significantly from 23% in April -- and 13% expect jobs at their companies to increase, while 15% expect them to decrease over the year ahead.
Big-firm earnings and global growth may drive profits on Wall Street, but small business is the major source of U.S. job creation. And most small-business owners are unlikely to hire as long as they are becoming increasingly uncertain about the revenues and cash flows of their companies in the months ahead.