Small Business Optimism Dips Third Month; Business Owners Cite Lack of Customers, Inflation as Problems; Keynesian Claptrap from Summers

In spite of all the yapping about banks not lending to small businesses, only 8% of businesses report getting loans is a problem. In contrast 25% say getting customers is the number one problem. An increasing number of owners cite rising inflation as a problem.

Please consider Small Business Optimism Dips Lower in May

The Index of Small Business Optimism fell 0.3 points in May to 90.9. This month marks the third monthly decline in a row. The proximate cause is the fact that 1 in 4 owners still report weak sales as their top business problem. Consumer spending is weak, especially for “services,” a sector dominated by small businesses. the index makes clear that optimism is moving in the wrong direction: a recession-level reading for an economy fighting its way through a recovery. Also, inflation is a growing concern now with 1 in 10 citing this as their most serious business problem meaning cost side pressures coming in the “back door,” not rising food prices at home.

“Corporate profits may be at a record high, but businesses on Main Street are still scraping by,” said NFIB chief economist Bill Dunkelberg. “Washington is throwing misdirected policies at the problem, offering tax breaks for hiring and equipment investment, but acting surprised when they don’t bear any fruit. The failure to understand why small-business owners are not hiring or investing has resulted in a set of policies that have not been very effective, and Main Street is suffering. The icing on the cake: the growing debt, large deficits, threats of higher taxes, regulations being spewed out by state and local administrations, and the uncertainty of the new health care law—is it any wonder that optimism is down?”

Highlights From NFIB Report

• Over the next three months, 13% plan to increase employment (down 3 points from April, down 5 points from March), and 8% plan to reduce their workforce (up 2 points), yielding a seasonally adjusted net negative 1% of owners planning to create new jobs.
• Only 5% of the owners view the current period as a good time to expand
• Fifty percent of firms reported making capital expenditures over the past six months, and the percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 20%, a recession level reading.
• Sales are down; the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 4 percentage points, falling to a net negative 9%, with more firms with sales trending down than up.
• 92 percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied, and 49 percent said they did not want a loan. Three percent reported financing as their #1 business problem
• The “feedstock” for inflation continued to grow, with the number of owners actually raising average selling prices reaching a net 15 percent, seasonally adjusted. Thirty-one (31) percent reported raising average selling prices, double the percent cutting prices which suggests that average price levels will be rising, and that is “inflation.”
• The Federal Reserve protests the notion that QE2 liquidity is driving commodity prices as liquidity scours the world to find a higher return than that offered by banks, but there is a strong correlation between Federal Reserve purchases and commodity prices.

Misguided Policies

Why would you want to expand or hire new employees if your problem is lack of customers?

The answer is you wouldn't and neither will small businesses. Yet Obama attacked the problem in January of 2010 with a $33 billion tax credit proposal.

The administration is floating the idea of tax credits once again on the assumption that Republicans may go for tax cuts. However, tax credits to spur hiring were bad policy in 2010 and they are still bad policy today.

Keynesian Claptrap from Obama's Former Top-Economic Advisor

More government spending and stimulus cannot possibly fix a problem that includes too much government spending and misguided stimulus efforts. Yet that is what Lawrence Summers suggests in How to avoid our own lost decade

This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

You have to be a Keynesian nutcase to believe more spending is the solution to problems caused by too much spending. Such policies have never cured one problem in history, yet proponents of such policies never learn.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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