Bussiness
Will Small Business Recover From Its “Depression”?
![Will Small Business Recover From Its “Depression”? Will Small Business Recover From Its “Depression”?](https://imageio.forbes.com/specials-images/imageserve/66a296e836b70479f56df231/0x0.jpg?format=jpg&height=900&width=1600&fit=bounds)
According to NFIB’s Index of Small Business Optimism, small business owners have been “depressed” since 2020 (Chart 1). Over the past 50 years, the Index has been lower than this year’s readings only in three periods: 1974-5, 1980-83, and 2008-9, all major recessions. But, we aren’t in recession now even though a recession has been predicted to occur this year using a variety of typical measures including the yield curve, Index of Leading Economic Indicators, NFIB, and more. Small business owners agreed, with only 8 percent expecting better business conditions six months from now, unchanged since February of this year (as high as 53 percent in 2020).
Small Business Optimism Index. NFIB Small Business Economic Trends.
An improvement in sales trends could make owners feel better. Twenty-four percent expect real sales to improve in six months, but 31 percent expect declines. Only 5 percent think it is a good time to expand their business, compared to an average of 24 percent in 2019. Thirty-two percent of those who say “no” cite economic conditions as the reason. Twelve percent cite the political environment. In July 2019, only 8 percent said “no” because of economic conditions, and only 6 percent said “no” due to the political climate. The election will change this, one way or another.
Credit markets and the Federal Reserve can have a major impact. Since 2020, the average short term interest rate reported on small business loans has risen from around 4 percent to over 9 percent. One percent expect credit conditions to improve, but 8 percent see credit market conditions worsening. However, a historically low percent complain that their credit needs were not taken care of, a good sign.
Earnings reflect the condition of the firm. Fourteen percent reported higher earnings in recent months, but 42 percent reported lower. In July 2019, 27 percent reported higher earnings, 26 percent reported lower, clearly a much more favorable business environment back then. Fourteen percent blamed lower sales for the decline, followed by labor costs (5 percent) and other input costs (7 percent). The key to sales is consumer spending, and consumers are not very optimistic about the near future. The University of Michigan Consumer Confidence Index fell to an eight-month low of 66. In 2016, the Index was in the 90s, much more optimistic.
Several major uncertainties will be resolved in the coming months, a presidential election, possible changes in “management” at major regulatory agencies, the Federal Reserve’s decisions about interest rates, and major developments in global conflicts that impact our economy. For the moment, owners are “in the dumps” and face a large number of uncertainties. As these are resolved, uncertainty will decline. Whether optimism increases or falls will depend on how the uncertainties are resolved.