As 2010 comes to an end, it seems that the best way to describe the state of small business is that those that have survived are treading water.
The NFIB Index of Small Business Optimism rose slightly in November. However, the index is still at a recession-level reading. Any improvement that we have seen in this index this year is the weakest of all "recovery" periods since 1973, the start of the NFIB surveys.
While some are calling this a weak recovery, I see no evidence that any appreciable recovery is taking place. The NFIB survey bears me out on this.
Employment improvement in small businesses continues to be anemic. The average gain in employment for November was 0.01 workers per firm. Up from 0.0 in October. Small businesses aggressively shed jobs for the first two years of the recession. Those businesses that have survived are operating at lean staffing levels right now.
Those businesses that have survived are beginning to invest in the future. While capital spending has been very low for the past two years, November saw some improvement. About half of all firms reported capital outlays over the past six months. However, spending is not on those things we would expect during a recovery. Most of the expenditures was on things that need to be replaced to maintain operations. Of those who spent money on capital items, 35 percent spent on new equipment, 19 percent acquired vehicles (up three points), and 12 percent improved or expanded facilities. Only 4% acquired new buildings or land for expansion, which is what will signal new growth in the economy.
"Spending seems to be primarily in maintenance mode - if it breaks, replace it," said Bill Dunkelberg, NFIB's chief economist.
Of major concern should be the sales forecasts of small businesses in the U.S. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months worsened in November. So small business owners continued the prudent course of liquidating inventories. November is the 32nd negative double digit month in a row and the 42nd negative month in a row for inventory changes.
Recent surveys have been finding that small business owners have been able to adjust to the new normal and hold earnings in spite of weakening revenues. However, earnings are showing signs of weakening once again. Far more owners report that earnings are deteriorating quarter-to-quarter than rising.
Credit, which is Washington's answer to any and all economic woes, is not a problem for small businesses. They really don't want or need more credit right now. They can get it, but they just don't want it. Overall, 91 percent reported that all their credit needs were met, or that they were not interested in borrowing. Only nine percent reported that not all of their credit needs were satisfied. A record 53 percent said they did not want a loan. Only 4 percent reported financing as their #1 business problem. Remember this the next time a politician touts yet another new loan program as the answer to spur small business growth.
All of this leads to me see an even rougher 2011. Those small businesses that have survived 2010, will likely face continued challenges next year. The best case scenario is yet another year of entrepreneurs barely keeping their heads above water.
The worst case? Well, since Christmas is almost here I won't be a Scrooge and spoil the holiday by sharing those scenarios.
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