Small Business: No Reason to Expand

The National Federation of Independent Business (NFIB) has a rather dour view according to their June 2011 economic trends survey.  One table says it all.

Small business is the driver of employment in the USA.  The above table shows small business is hunkering down with:

one in four owners still reports “weak sales” as their top business problem and surveys of consumers show they are uncertain about the future as are business owners.

Remember readers, this is a survey.  Survey’s try to quantify opinion.  This survey is actually showing a slight fall in sentiment – and likely is in itself is not statistically significant.

However, as an overview – small business optimism remains in recession territory, had has remained in an overall cyclical downtrend since 2004.

Econintersect believes a portion of the commentary in the report nails the cause of continuing weak NFIB surveys:

Failing to understand the reasons small business owners are not hiring or investing has resulted in a set of policies that have not been very effective. Low interest rates are not an inducement to buy capital equipment that is not needed. Remember, there was much hiring and expansion based on spending by consumers who did not save. Now there is “excess capacity” and it has not yet been rationalized.

It is simple: when sales pick up, owners will have a reason to hire more workers to take care of customers, to produce more output and will have a reason to invest in new equipment and expansion. The proximate cause of the collapse of spending in 2008 was reduced consumer spending.

Catch 22 – there likely is no politically acceptable way of repairing the consumer.  The USA economy is consumer driven.  The consumer did not come back to the table as this recession was induced primarily due to the consumer reaching its credit limits.  With home prices continuing to fall (lowering the consumer’s net worth), credit is continuing to contract on a per capita basis.