Small business optimism inched higher but all it really means is things are getting worse at a falling rate. Please consider U.S. Small-Business Optimism Index Rose in January.

Confidence among U.S. small businesses increased in January for the first time in three months as the outlook for sales improved, according to the National Federation of Independent Business optimism index.

The gauge climbed to 89.3, the highest level in 16 months, from 88 in December, the Washington-based organization said today. The advance left the measure close to the 2009 low of 81 reached in March, which was second only to a 1980 reading as the lowest on record.

Three of every 10 companies surveyed said a lack of sales remained their biggest concern even as the demand outlook turned positive for the first time since January 2008, the month after the recession began. A majority of small businesses expect profit and employment to decline, showing why the Obama administration has announced new plans aimed at providing credit and tax breaks to small firms.

“This is very disappointing for an indicator of the health of the most critical segment of the economy in terms of new job creation,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York.

“The good news was less bad news,” William Dunkelberg, chief economist at the NFIB, said in a statement. “Optimism has clearly stalled in spite of the improvements in the economy in the second half of 2009.”

President Obama last week announced he will back a temporary increase in Small Business Administration loans to $1 million from $350,000 to encourage hiring. He has previously endorsed $33 billion in small business tax cuts and incentives for hiring as well as a plan to use $30 billion of bailout money paid back by Wall Street financial institutions to help community banks make loans to small businesses.

Such aid is “misdirected,” NFIB’s Dunkelberg said in the statement, because the top problem for small business leaders is weak demand rather than a lack of credit. Stimulus therefore should focus on reviving consumer spending, he said.

Recovery In Doubt

Please consider No Job Growth for Small Business Spurs Recovery Doubt.

Small businesses are becoming the Achilles heel of the U.S. recovery by limiting growth and job creation.

The National Federation of Independent Business’s index of small-business optimism has been near historic lows for 15 consecutive months, declining to 88 in December from 88.3 in November, the federation reported Jan. 12. During the four prior recessions, it dipped below 90 only once.

Recent numbers suggest “the official data are too heavily weighted towards bigger companies, which are doing better than credit-constrained smaller firms,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. “The latter employ half the workforce.”

The nation’s monthly payroll figures are inflated because the Labor Department model that estimates small-business hiring has overstated the number of jobs added during the recession, Shepherdson says.

According to the model, small companies created an average of 113,000 jobs a month from February through December — a period when total employment fell by a nonseasonally adjusted 3.7 million, Labor Department statistics show.

The model “is creating jobs out of thin air that are not actually being generated,” Joshua Shapiro, chief U.S. economist at MFR Inc., an economic-consulting firm in New York, said in a Feb. 4 note to clients.

NFIB Slams Washington

Inquiring minds are reading NFIB Small Business Trends February 2010.

Washington still does not get it. It pays lip service to the fact that small business generates half of private sector GDP and creates over two-thirds of private sector net new jobs, but when it comes time to provide help, small business gets $30 billion IF banks decide to accept the TARP funds to support loans and IF the owners can subsequently get a loan from a bank. But for most firms, this dinky amount is of little help. More so, this new aid misses the main problem since only five percent of small business owners cite “financing” as their top business problem but 31 percent cite “poor sales.”

We are building less than half of the number of housing units normally constructed, putting a huge dent in mortgage and construction loan demand. We are also buying two-thirds the number of cars normally purchased, so auto credit demand is way off too. Plans for capital expenditures and inventory investment among small firms are at 35 year lows. Even large bank CEOs now admit loan demand is weak! “Stimulus”
for this administration has not focused on supporting consumer spending nor been designed with a sense of urgency as central to policy formulation.

Instead, Congress is focusing on a health care bill that features crippling taxes and mandates for small firms, fully expecting to have it in place and implemented (10 years of taxes, seven years of “reform”) this year with unemployment at 10 percent and expected by many to rise. Lawmakers also allowed the minimum wage to rise by nearly 11 percent in July 2009, catapulting teen job loss to over 500,000 and an unemployment rate of 27 percent in the second half even though the economy started growing. This was double the loss in the first half when GDP growth was plummeting.

If the administration wants to count “jobs created and saved” it should also be accountable for “jobs destroyed or prevented.”

Obama’s Misguided Plan

The Administration wants banks to lend money to small businesses. It also wants small businesses to hire. However, in spite of all the rhetoric coming out of DC, the problem is not lack of credit, something I have noted many times.

There simply is no reason for businesses to hire with demand so weak.

Giving tax credits to businesses who hire is a total waste of taxpayer money. It will benefit large corporations who were going to hire anyway. It will do nothing for small businesses who have no plans to hire.

On the other hand, raising the minimum wage and increasing taxes will both hurt small businesses. So do Obama’s tax hikes and so do state tax hikes. The latter primarily feeds money to an already bloated public sector at the expense of everyone else.

Mike “Mish” Shedlock
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