Small Business Recovery – Starts Now!

Here Comes the Small Business Recovery

Better late than never, small businesses appear to be leaving the recession behind and starting on a track of slow, but steady growth.  The National Federation of Independent Businesses’ (“NFIB”) latest survey results show the optimism index flat, but up off the 1Q09 bottom.  The stabilization in small business confidence is echoed by the Discover Financial small business index, which showed a similar stabilization in February. If things are no longer getting worse they must be getting better, right?

Source:  NFIB Small Business Economic Trends Monthly Report February 2010.

Thus far the recovery has left small businesses behind as the larger companies, buoyed by big federal government bailouts, and benefitting from export sales, have outperformed the small business sector.   This quagmire has slowed the recovery and substantially hindered employment.  According the Federal Reserve economists small businesses represented almost half of the lay-offs during this recent downturn.  That is an astounding figure!

Until unemployment drops and disposable income rises, small businesses will be hampered by lower sales and therefore, an inability to re-hire.  It becomes a vicious circle that could lead to stagnation.  But I don’t see that happening.

Small businesses are strongly linked to the American consumer’s disposable income.   The NFIB economic reports are widely quoted as measures of the health of small businesses.  So then how are small businesses linked to disposable income?  To see the linkage, all you have to do is review the small business industry concentrations.

The NFIB membership is a broad cross section of small businesses across the country so regional factors get cancelled out in the results.  However, over 60% of the small businesses are in industries tied to consumer spending (Retail, Construction and Services).  When these industries do well, small businesses hire and expand.  When they do poorly, small businesses fire and retrench.  The business owners end up working more in order to fill the staffing gap.

The NFIB and Discover Financial surveys both largely cover businesses with less than 10 employees.  These are micro businesses when compared to the Small Business Administration’s definition of small business as generally less than 100 employees.

For the first time in several quarters the expected sales of small businesses are up strongly.  The chart below is from the NFIB and the thin line represents expected sales over the next three months.  It is rocketing upward!

Source:  NFIB Small Business Economic Trends Monthly Report February 2010.

The slope of the line representing the increase of expected sales over the next three months appears to be the highest coming out of any recession over the last 24 years.  That makes me believe that the small business sector is poised for a rebound in 2010 that should be decisive, measurable and sustainable.  However, it may not result in a big drop in unemployment.  That is because many small businesses (nearly half) are planning to acquire new business assets and not new employees.

The NFIB CAPEX chart shows what appears to be a very small uptick in CAPEX plans.

Source:  NFIB Small Business Economic Trends Monthly Report February 2010.

However the uptick is substantial in the context of where we have been.  This is the spike that will be heard around the world as it points to a rebound of small businesses in 2010.  If I am right and small businesses rebound will they hire?  Probably not.

According to the NFIB survey 50% of the planned CAPEX will be for equipment and vehicles.  Only 8% is expected to be for furniture/fixtures, which could be correlated with new hiring, as employees need space in which to work.

So pay careful attention to the coming statistics because I read today’s economic “tea leaves” as a sign that the sleeping giant that is small business, is awakening.

Hugh Connelly, CFA

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avatar Posted by on Apr 6 2010 Filed under Featured. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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