Survey: Small Business Optimism Drops, But Remains In Positive Territory

By Don Jergler | August 8, 2012

The Wells Fargo/Gallup Small Business Index fell six points to positive 17 in a survey conducted in July that reflects on the third quarter, but one economist who worked on the poll is taking the positive view that following the election the economy may just start to pick up some steam.

San Francisco, Calif.-based Wells Fargo and Gallup surveys U.S. small business owners quarterly to gauge perceptions of the past 12 months and their future expectations over the next 12 months in six areas: financial situation, cash flow, revenues, capital spending allocation, hiring, and credit availability.

The index ranking of 17 is down from a high of 23 in April, but much higher than a year ago. The quarterly survey was conducted July 9 through 13 with a sample of 600 small-business owners. Up until January 2011 the index was neutral or negative.

The quarter’s decline in the index erases gains experienced earlier this year and brings to light the lingering concerns business owners have about their future financial situation, revenue, and cash flow, but it also holds some positive notes, according to a Wells Fargo economist.

“I think what’s more significant is the index has been in positive territory for the last three months,” said Mark Vitner, managing director and senior economist at Wells Fargo.

More firms are planning to allocate fewer dollars rather than more for capital outlays, and more firms polled plan to reduce employment rather than increase it, the poll shows. However, the gap between those with negative and positive attitudes has closed a bit, he said.

“The differential has narrowed,” Vitner said. “That gap has narrowed. I think we’re closer to the point where small businesses are going to be spending a little bit more money and expanding their operations, and purchasing more equipment.”

Continued narrowing of that gap would be good news for businesses selling to those firms, such as insurance agents, as well as job seekers, “but unfortunately we have to get past the presidential election first,” Vitner said.

The No. 1 answer from those who said they won’t be spending is they are waiting for their business to improve, but that was followed closely by those who won’t be spending who said they are awaiting more certainty from the economic policy that will dictated depending on who wins the election, according to Vitner.

“I really think that there’s so much uncertainty following Europe’s financial crisis,” he said. “A lot of folks I think are just going to put off key decisions until we get past the election.”

Vitner said it’s typical in a presidential elections for businesses to hold back on key decisions with attitudes like: “Who knows, there may be another round of stimulus that comes out after the election. There may be tax incentives to spur the economy.”

Despite Vitner’s slice of optimism, investment figures have been low for a long time. The poll has shown that the number of those who plan to spend less for capital outlays as opposed to more has been balanced toward “less” for the last 18 quarters.

The number of business owners expecting to be in a good financial position over the next 12 months declined seven percentage points to 59 percent, while those expecting increased revenues in that period fell by six percentage points to 43. Despite the declines, business owner optimism has improved significantly from the recession low point when the index dipped to minus 28 in the third quarter of 2010.

Fifty-three percent of business owners say they have made capital investments over the past 12 months, with the 70 percent reporting purchases of new equipment or machinery, the poll shows.  About four in 10 business owners say they plan to make capital investments in the next 12 months.

Roughly 64 percent of small business owners planning to make capital investments over the next 12 months say they intend to make them in new equipment, machinery and technology. Of those 61 percent say they will purchase computers 61 percent, 56 percent way they will purchase new software or add to or build websites, a little over half say they will invest in mobile devices.

According to the poll, lower expectations for increased revenues in the next 12 months may be problematic for small business owners who plan to fund capital expenditures primarily with business revenue and profits rather than relying on credit or savings.

Business owners who said they plan to make a capital investment over the next 12 months say they plan pay for it using:

  • Business revenue/profits (93 percent)
  • Credit (39 percent)
  • Savings (31 percent)
  • Some other way (16 percent)
  • Outside investors (14 percent)

But Vitner, with another note of optimism, emphasized his belief that following what is shaping up to be contentious elections, the U.S. economy will regain some steam.

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