“Foot traffic” Recession Continues to Weigh on Small Business Sentiment

The small-business-optimism index from the National Federation of Independent Business rose 0.8 points to 95.8 in February, reversing the 0.9-point drop in January, leaving the index little changed over the last three months but well below the 104.0 result from October (see top of first chart). The latest result is also well below the 1986 through 2006 average of 101.0.

Details within the report suggest that small-business owners remain concerned about future general economic conditions and about their own business. The report also highlights the sharp difference among different areas of the economy, with construction, manufacturing, and professional services doing well but “foot traffic” industries such as retail, restaurants and other direct contact services still deeply impacted by government lockdowns.

Within the details of the small business survey, the net percentage of respondents expecting better economic conditions (“better” minus “worse”) rose to -19 in February versus -23 in January. This index had been as high as 39 in June 2020 but has been negative for three consecutive months (see bottom of first chart).

A net -8 percent expect higher sales over the next three months versus the prior three months, down from the net -6 percent in January. Excluding a three-month run of negative results during the worst of the government-imposed lockdown from March through May 2020, the current three-month run of negative readings are the worst results since 2011 (see bottom of first chart). A net 2 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 9 points from a -7 percent in January.  

Along with the weak results from the expectations for the economic outlook and the outlook for sales, the percentage of respondents believing now is a good time to expand came in at 6 in February, down 2 points from the previous month, and a generally weak result compared to the 2017 through 2019 average of 26.1. Twenty-three percent of firms have plans for capital expenditures over the next three to six months, up 1 point from the prior month. Fifty-seven percent of small businesses have made capital expenditures during the past six months, up 2 points from the prior month. That is below the typical percentage in the upper 60s during the late 1990s but above the mid-40s percentages during the 2008-09 recession. The most popular type of expenditure was equipment (40 percent) followed by vehicles (28 percent) and building/land improvement (12 percent). The most popular outlay range was $10,000 to $49,999.

The percentage of firms planning to increase employment rose one point to 18 percent in February. A record 40 percent of firms (up from 33 percent in January) report having openings they are not able to fill at the moment despite the elevated level of unemployment (see second chart). The percentage of firms reporting few or no qualified applicants for job openings was 51 percent, up from 46 percent in January, and a high level historically (see second chart). The results suggest there is a skills shortage in the U.S.

That skills shortage has 25 percent of firms saying they have already increased compensation over the past three months while 19 percent intend to increase worker pay over the coming months.

The skills shortage is also keeping quality of labor at the top of the most important issue for small businesses. Among the 10 issues listed in the survey, quality of labor again ranks first at 24 percent, 3 points below the survey high of 27 percent. Taxes were second at 18 percent while government regulation (red tape) was third at 15 percent and poor sales was fourth on the list at 11 percent (see third chart). Also noteworthy is that inflation and interest rates remain low in the rankings.

Overall, the survey suggests that the small-business sector of the economy remains somewhat cautious, particularly in the hard-hit “foot traffic” or direct-contact industries. Still, while small businesses may be cautious about the outlook, they are looking to hire employees and make some capital expenditures. Finally, despite the soft labor market, a shortage of skilled workers continues.

* This article was originally published here

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