Bank of the West U.S. Outlook Report for November 13, 2015

US Outlook Report: Will Small Business Confidence Ever Recover?

The pessimism among small business owners throughout this expansion is unprecedented. According to data from the National Association of Independent Businesses, this is the slowest recovery in small business confidence ever coming out of recession, going all the way back to the mid-1970’s.  Small business optimism briefly moved above 100 in January of this year, a more normal expansionary reading, before retreating back to levels often seen in the midst of mild recessions. In this week’s report we dig a little further into the data to see what might be behind this lingering pessimism among small business owners more than six years into this economic expansion and why we believe small business confidence could move higher from here.


First, it’s important to point out the psychological trauma that the financial crisis and Great Recession brought on most small business owners. A considerable share of small business owners are dependent on strong consumer spending and housing to boost sales. So the housing market collapse that didn’t start to turn around in this country until the end of 2012 decimated these businesses’ sales with little prospect for a near-term recovery. It’s no coincidence that small business confidence did not embark on a strong rebound until housing sales, home building, and home prices started their rapid advance out of the depths of the Great Recession.


Small business surveys often noted that the biggest concern among small businesses was a lack of demand and sales, economic and financial uncertainty, onerous government regulations – including new health care laws – and some concern about tighter bank credit.  Gradually those concerns dissipated allowing a steady but slow rebound in small business confidence that peaked in December of last year. But uneven GDP growth this year, and rising concerns surrounding low commodity prices and global growth helped push small business sales expectations back down to the low levels seen over much of this expansion.


However, there are still plenty of positives for small businesses to point out. First, the financial channels that were briefly closed for many small businesses are now wide open and functioning normally. Banks are competing more for small business customers, providing ample credit at attractive terms for those small businesses in need of financing.


Small business earnings trends are also near expansion highs and at levels seen in past expansions.


Small business capital spending plans have improved in recent months, hiring plans are stable and robust, and more compensation plans are incorporating wage and salary increases, all good signals that small business conditions are better than they have been for years.


Our forecast is that 2016 growth will continue to be led by solid consumer spending and residential construction, which should put a floor on diminished sales expectations for most small businesses. So while the pull-back in small business confidence this year is disappointing, the outlook for small businesses in my opinion is hardly tarnished, setting us up for a rebound in small business confidence in the months ahead.


To learn more, check out this week’s US Outlook Report.

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