Small businesses' outlook glum

The Baltimore Sun

Amid a constant drumbeat of news about struggling big-name companies, it's easy to forget that small businesses are suffering, too.

The most recent Small Business Optimism Index, released monthly by trade association The National Federation of Independent Business, shows the second-lowest reading in the 35-year history of the survey. The December index fell 2.6 points to 85.2, which also was the lowest reading since the second quarter of 1980, according to the group.

"It's pretty deep," NFIB chief economist William Dunkelberg says of the recession. "It's also moving very quickly. We were slow in the first three quarters of the year, but we still were growing. Everything fell out of bed in the fourth quarter."

Small businesses play a significant role in our economy.

Consider that small firms employ half of all private-sector workers, according to the U.S. Small Business Administration. And they have created 60 percent to 80 percent of net new jobs annually for the past decade and represent more than half of the private gross domestic product in the United States. (The government defines a small business as an independent company with less than 500 employees. A typical NFIB member employs five people and reports gross sales of about $350,000 annually.)

The NFIB index is based on survey indicators for employment, capital spending, inventories and sales and profit, among others. The December survey included 805 small businesses across a broad range of industries, including retail, financial and construction.

Dunkelberg says small-business owners are making changes quickly to adjust to worsening economic conditions, including limiting compensation and hiring.

For instance, the average employment per firm declined 0.86 workers, the largest monthly decline in survey history.

And during the next three months, 19 percent of small businesses plan to cut the work force, while only 8 percent plan to create jobs.

Small-business owners are also postponing capital spending. In December, 51 percent of owners made capital investments during the past six months, down 5 points from the previous month.

The number of owners planning to make capital expenditures in the next few months dropped 4 points to 17 percent, the second-lowest figure since the 1974-1975 period.

"It all sounds bad, but it also tells you they're adjusting to the new level of consumer spending," Dunkelberg says.

When it comes to profit, 53 percent of small-business owners said earnings fell, compared with 50 percent in November. Twelve percent said profits were higher, down 2 points.

Many business owners attributed falling profits to lower sales and increased costs of doing business, according to the index survey.

There was one bright spot in the survey, though.

Small-business owners said they felt more optimistic about economic conditions for the next six months compared with how they felt in the first quarter of 2008, Dunkelberg says.

"That's the only good thing we could grab onto," he says.

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