Sunday, February 3, 2013

Small Businesses Mostly Pessimistic, Except In Astoria - Seeking ...

The NFIB Small Business Optimism Index for December 2012 improved over November, but it did not reflect positive sentiment at the close of the year. The report showed the index edged up by a half of a point to a mark of 88.0 in December. At that level, the index was still at its lowest point since March of 2010.

Obviously, uncertainty about the economy prompted by the fiscal cliff fiasco and Congressional dysfunction is what pinched the perspective of small businessmen at the close of the year. Direct tax consequences to businessmen and an indirect potential impact to the economy hinged upon developments in D.C. Bill Dunkelberg, the chief economist of the NFIB, noted that the next survey measuring January sentiment will shed light on the level of satisfaction of small businessmen with the midnight hour deal. Still, budgetary battles lie ahead, and a potential government shutdown looms as well.

The NFIB subtitled its press release this month, "One of the Lowest Optimism Readings in Survey History." Indeed, it reflected a significant degree of pessimism, just up slightly from November's historic low mark. The NFIB noted that December's reading was more indicative of a recessionary period than one of growth. The details of the data revealed that the index was hindered by a deteriorated labor market and the great degree of small businessmen nationally who expect operating conditions to worsen over the next six months. The NFIB indicated that 70% of business owners surveyed characterized the current period as poor for expansion. Obviously, the issues worrying small businessmen these days are plentiful. Some of the more important issues, according to the NFIB data, are political uncertainty (25%), taxes (23%) and regulations (21%).

Obviously, the macro issues discussed above are out of the control of small businessmen and are anecdotal. However, small business people are intimately tied to their sales results, and 19% of those surveyed said "poor sales" were their toughest challenge. The NFIB reported that just 18% of business owners surveyed saw higher sales over the last three months, while 30% reported lower sales results. A representative of Mike's Diner, an iconic spot in Astoria, New York, indicated to me that, "Sales are increasing, but it has been at a snail's pace. The economy is moving in the right direction, just very slowly."

Diners offer value, but even fast-food chains like McDonald's (MCD) have seen issues in the U.S. lately, though we proposed recently that this was because of the "better burger" threat the company faces. Of those business owners surveyed by the NFIB, 20% expect sales improvement over the next three months, while 40% expect decline on a non-seasonally adjusted basis. Shelley & Nikoletta at Kentrikon & Noufaro, a wedding and other special events store, also in Astoria, said, "We see people coming in earlier than usual this year, with orders already being booked. This bodes well for a good spring season, and has us optimistic about the year." The wedding business may be seasonal, but it's also somewhat recession-resistant (I would expect). I think each of these characteristics (seasonal and defensive) is visible in the 5-year chart of XO Group (XOXO), a company that focuses on the wedding market.

Chart forXO Group Inc.

Chart from Yahoo Finance

Hiring patterns are, of course, critically important to our broader economy. We just completed a study pending publishing showing that the true unemployment rate is likely closer to 11.8% than the reported 7.9%. Small businesses employ the majority of Americans, and so their hiring plans are of critical importance to the economy. The NFIB reported that 41% of business owners hired or attempted to hire employees over the last few months, but that includes for replacement purposes. Employees per firm only increased by a tiny 0.03 people per firm, with just 11% of the business owners saying they added an average of 2.9 workers per firm over the last few months. Some 13% of those surveyed reduced employees by an average of 1.9 workers, while 76% made no change. On net, small businesses projected just a 1% increase in employment in the months ahead. Before seasonal adjustment, only 7% of business owners plan to increase employment in the months ahead, while 11% plan to reduce their workforce. Layoffs continue across large and small firms, with Citigroup (C) being perhaps the most notable ax wielder at the close of 2012, when it announced significant layoffs.

Credit availability has improved as the economy has begun to find its way. However, the NFIB said approximately 65% of its survey respondents were disinterested in new debt funding. Only one percent of business owners said finding credit was their biggest problem. 29% said they borrow on a regular basis. The most important question for business owners is how hard is credit to come by today. A net of 9% of those regular borrowers said that loans were harder to get, not easier. Also, a net greater number of owners expect credit to be harder to come by in the future. Regarding capital spending, the NFIB confirmed that most companies were operating in "maintenance mode," or just spending enough to keep their current operations fresh. The percentage of owners planning capital outlays for the next six months was 20%.

I asked a few business owners if they noted increasing credit card usage by customers. Regina Katopodis, Co-Owner and Manager of Artopolis, a thriving bakery and patisserie in the heart of Astoria, New York, said, "There are more, and we don't mind." She continued, "We understand times are tough, and so we have always accommodated our credit card paying customers by having no minimum spend limit. Someone can buy a cup of coffee on credit, and even though it impacts our profit margins, seeing people through tough times is more important to us."

The handful of small business people I spoke with in New York were generally more positive than what the NFIB data indicates about sentiment nationally, but maybe that says something about busy New Yorkers and a certain level of optimism that exists here. The New York population center is going to be busier than other areas, because it replenishes itself. When a company goes out of business here, it tends to be replaced by a new firm with bright ideas. Likewise, vacated apartments are quickly filled by newcomers with new jobs. As a result, the big city may sink a bit in recession, but it always resurfaces before long with new vibrancy. When asked about the economy and business conditions in 2013, the New York respondents were more optimistic than what was seen nationally, and I think that's why.

When the next NFIB report reaches the wire this month, I expect the data will show improvement. It should benefit from the passing of the fiscal cliff fiasco and debt ceiling mitigation. The ongoing real estate recovery and the nascent stock market rally, with the SPDR S&P 500 (SPY) and the SPDR Dow Jones Industrial Average (DIA) gaining in the mid-single digits in January, should likewise be supportive of sentiment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

Source: http://seekingalpha.com/article/1151591-small-businesses-mostly-pessimistic-except-in-astoria

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