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By National Federation of Independent Business

WASHINGTON, September 13, 2011 – Confidence in the economy among small-business owners tumbled in August, as NFIB’s monthly Small-Business Optimism Index dropped a whopping 1.8 points, settling at a disturbingly low 88.1. The Index has now been in decline for a full six months. Unlike previous months, August’s decline comes in the immediate aftermath of the debt ceiling debate, suggesting a small business “vote of no confidence” in the agreement reached in Washington.

Small business optimism plunged in August – NFIB“The results of this month’s survey are very telling,” said NFIB Chief Economist Bill Dunkelberg. “The tumultuous debate over the nation’s debt ceiling and a dramatic 11th hour ‘rescue’ by lawmakers did nothing to improve the outlook of job-makers. In fact, hope for improvement in the economy faded even further throughout the month, proving that short-term fixes will not help. Private sector decision makers think longer term and they don’t like what they see. There is little clarity or certainty. When people are uncertain about the future or fear it, they don’t spend or invest, and they chase after protection—and protection is unlikely to come from the government.”

The results of this month’s survey provide a window into how the debt ceiling debate impacted the outlook of the small-business community. The July survey interviews were taken as the issue was debated; and the Administration’s debt ceiling deal was announced just as NFIB mailed its first wave of interviews for the August survey. The resulting Index was one of the largest declines in owner optimism posted in the last six months. Expectations for real sales gains and improved business conditions account for most of the decline in the Index. The four components in positive territory eased some of that loss, although not by much, landing the Index at a 1.8 point loss.

Some other highlights of August’s Optimism Index include:

* Sales remain the largest problem for small firms—a full quarter identifying “poor sales” as their top business problem. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 1 percentage point, falling to a net negative 9 percent, with more firms with sales trending down than up. Not seasonally-adjusted, 27 percent of all owners reported higher sales (last three months compared to prior three months), down 2 points from the prior month, while 28 percent reported lower sales (unchanged). Expectations for future sales are also in decline, with the net percent of owners expecting higher real sales falling 10 points in August, to a net negative 12 percent of all owners (seasonally adjusted), 25 points below January’s reading. Not seasonally adjusted, 21 percent expect improvement over the next 3 months (down 6 points) and 34 percent expect declines (up 7 points). Owners appear to have lost confidence in the economy and the government’s ability to assist the recovery.

* The net percent of owners expecting better business conditions in six months was a negative 26 percent, down 11 points from July, and 36 percentage points lower than January. A negative 12 percent of all owners expect improved real sales volumes, 25 points worse than January. Only five percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point and 3 points lower than January. Of those reporting higher profits, 45 percent credited higher sales and 5 percent each credited lower materials cost and higher selling prices. Of those reporting negative sales trends, 45 percent blamed faltering sales, 5 percent higher labor costs, 15 percent higher materials costs, 3 percent insurance costs, 8 percent lower selling prices and 10 percent higher taxes and regulatory costs.

* The frequency of reported capital outlays over the past six months rose 2 points to 52 percent of all firms in August, the first improvement in many months. Of those making expenditures, 36 percent reported spending on new equipment (unchanged), 20 percent acquired vehicles (up 3 points), and 13 percent improved or expanded facilities (up 1 point). Five percent acquired new buildings or land for expansion (unchanged) and 10 percent spent money for new fixtures and furniture (unchanged). The percent of owners planning capital outlays in the next three to six months rose 1 point to 21 percent, a recession level reading that has typified the recovery to date.

* Over the next three months, 11 percent plan to increase employment (up 1 point), and 12 percent plan to reduce their workforce (up 1 point), yielding a seasonally adjusted 5 percent of owners planning to create new jobs, a 3 point gain over July. Job creation saw minimal improvement from the previous month. Owners reported reducing employment an average of 0.08 workers per firm over the past few months. This was an improvement from June’s -0.23 workers per firm and July’s -0.15, but still a poor showing. Fifteen percent (seasonally adjusted) reported unfilled job openings, up 3 points, suggesting that the unemployment rate could ease a fraction or remain unchanged.

Today’s report is based on the responses of 926 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of August. Download the complete study at http://www.nfib.com/sbetindex.