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Thursday, December 13, 2012 1:01 PM

Small Business Owners Cut Capital Expenditures, Plan to Cut Even More

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According to the latest Gallup survey, Small-Business Owners Pull Back Capital Spending Plans. Moreover, net capital spending by small businesses declined over the last year as well.

Here is the question Gallup asked "Over the next 12 months, do you expect the amount of money your company allocates for capital spending -- such as computers, machinery, facilities, or other long-term investments -- to increase a lot, increase a little, stay the same, decrease a little, or decrease a lot?"

U.S. small-business owners' net capital spending intentions for the next 12 months plunged to -14 in November, the lowest level in more than two years, according to the Wells Fargo/Gallup Small Business Index. This is down from net capital spending intentions of -1 in July and suggests the nation's small-business owners are likely to pull back on their business investments even more, given their negative expectations for the next 12 months.

The -14 November score is based on 20% of small-business owners saying they expect to increase their capital spending over the next 12 months and 34% saying expecting to decrease their capital spending. The 20% "increase" reading is down from 23% in July and the lowest level since July 2010. The 34% "decrease" reading is the highest since July 2010. In the current survey, 45% of owners expect no change in their capital spending.

The current negative net capital spending intentions mark a significant shift from the positive double-digit scores seen prior to 2008. Positive net spending intentions reflect how small-business owners usually expect to grow their businesses and take advantage of advancing technologies to help them do so. However, this has not been the case since the recession and financial crisis of 2008-2009, with net capital spending intentions reaching a low of -23 in November 2008. Small-business-owner capital spending expectations were slightly positive during the first two quarters of 2012, before turning neutral in July, and then plunging in November. The last time net capital spending intentions were lower than they are today was in July 2010, at -20.

Owners' Net Capital Spending Down Over Past 12 Months

The survey also asks small-business owners to report on their capital spending over the past 12 months. In November, more owners reported decreasing their capital spending (40%) than increasing (18%) it, resulting in a net capital spending score of -22. This is down from the -11 of July and the similar prior two quarterly measurements of 2012. Net capital spending over the past 12 months is now about where it was in October 2011, at -24.

The 18% of small-business owners who in November reported increasing their company's capital spending over the past 12 months is about the same as the 19% who voiced the same opinion a year ago. Similarly, the 40% reporting a decrease in capital spending over the past 12 months is just slightly lower than the 43% of October 2011. These numbers suggest that small-business' owners reported capital spending has not matched their expectations, even as capital spending intentions have deteriorated.
Positive Spin

Gallup attempted to paint this in a positive light noting an "enormous level of pent-up demand for such investments and a potential for explosive capital spending by the nation's small businesses whenever the U.S. economy can return to a sustainable growth path that permits owners and lenders to grow their companies."

When is that?

I suggest no time soon. The US is back in recession or certainly headed there (take your pick). Regardless, given souring consumer attitudes coupled with a death of jobs except part-time jobs resulting from Obamacare artifacts, there is no reason for most small businesses to expand.

Indeed, for most companies, expansion at this point would be suicidal.

Mike "Mish" Shedlock

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