Home Economic Trends Historic Drop in Small-Business Optimism As COVID-19 Spreads – Robert Hughes (04/09/2020)

Historic Drop in Small-Business Optimism As COVID-19 Spreads – Robert Hughes (04/09/2020)

The small-business-optimism index from the National Federation of Independent Business plunged a record 8.1 points to 96.4 in March versus 104.5 in February (see top chart). The latest result ends a run of 39 consecutive months above 100. The index is now at its lowest level since October 2016.

According to the report, ‘The COVID-19 outbreak and regulatory responses to curtail its spread shook the small business sector in March. Small business owners’ outlook is bleak as they wrestle to adjust quickly to rapidly changing economic conditions. Many owners have had to close their doors and others are scaling back operations dramatically.”

Within the details of the small business survey, the percentage of respondents believing now is a good time to expand came in at 13, down from 26 in February while the net percentage of respondents expecting better economic conditions (“better” minus “worse”) fell to 5 in March versus 22 in February (see bottom chart).

A net -12 percent of respondents expect higher sales over the coming months, down from 19 in February, while a net 8 percent report higher sales for the most recent three months versus the prior three months (see bottom chart).

The percentage of firms planning to increase employment dropped to 9 percent in March versus 21 percent in February and a high of 26 percent in August 2018. Surprisingly, 35 percent (versus a record 39 percent) of firms still report having openings they are not able to fill at the moment. At the same time, the percentage of firms reporting few or no qualified applicants for job openings was 47 percent, down from 52 percent in February and now 10 points below the record 57 percent from August 2019.

The combination of healthy labor demand and weak supply has 31 percent of firms saying they have already increased compensation over the past three months while 16 percent intend to increase worker pay over the coming months.

The labor-market dynamics have made quality of labor the most important issue for small businesses. Among the 10 issues listed in the survey, quality of labor still ranks first at 24 percent, three points below the survey high of 27 percent. Taxes were second at 15 percent while government regulation and red tape was third on the list at 13 percent.

Twenty-one percent of firms have plans for capital expenditures over the next three to six months, down from 26 percent from the prior month. Sixty percent of small businesses have made capital expenditures during the past six months. That is slightly below the typical percentage in the upper 60s during the late 1990s but well above the mid-40s percentages during the last recession. The most popular type of expenditure was equipment (43 percent) followed by vehicles (26 percent) and building/land improvement (16 percent). The most popular outlay range was $10,000 to $49,999.

Overall, the survey suggests the small-business sector of the economy is suddenly feeling the dramatic impact of the COVID-19 virus and are scrambling to find ways to survive.