Small Biz Confidence Stumbles at Mid-Year

This month, however, another closely watched business mood tracker said that small business owners' economic confidence leveled off in June to halt a two-month rise. The dip, although not large, reflected increased unease about the near-term outlook for smaller firms. What happened?

Cash flow issues led the list of concerns in the June report from the Discover Small Business Watch, a survey conducted monthly by Discover Financial Services. Of 750 small business owners polled, half (51%) reported temporary cash flow issues, up six percentage points from May. Overall, concerns about cash flow were chiefly responsible for driving down the survey’s confidence index to 86.1 in June from 87.4 in May despite some reported improvements in business conditions for the respondents.

For example, although 43% of the owners said they planned to decrease spending on advertising, inventories, and capital expenditures, they were fewer in number than the 46% who said they planned to curtail investment in May. There was a slight increase (from 28% to 30%) in the number of those saying economic conditions for their businesses are improving, and a small decrease (from 56% to 51%) among those who rated the economy as poor.

But these responses were offset by other answers signaling persistent doubt about how small business owners expect to fare as the global economy continues to churn. Sizable percentages of respondents said that their businesses had been negatively affected by the stock market (51%), the Gulf oil spill (30%), and the debt crisis in Europe (40%).

The mid-year slowdown in confidence has provoked plenty of rumination in the online news media and the blogosphere. In a recent interview on CNBC, for example, Alan Greenspan, the former Federal Reserve Chairman, said that the recovery isn’t proceeding the way recoveries typically do—with small businesses leading the way in expanding and hiring more workers.

“People don't want to hire because they’re concerned they may have to let them go,” Greenspan is quoted as saying in this commentary. “Small business is in real, serious trouble.”

This interview with the president of a company that processes payrolls for about 30,000 small companies details the malaise. Among other things, he’s concerned about the fact that whatever job growth we are seeing consists more of contract workers than of full-time employees. Because the “1099s” have less job security and less income than the “W2s,” they also spend less—a behavior that translates into reduced income for small businesses.

And that’s what makes the circle vicious: “Less revenue means no one hiring,” the payroll executive is quoted as saying.

“All of those things create uncertainty for someone running a business because they don’t know what the costs or what the economic climate will be,” he goes on to observe. “And if you’re uncertain, you freeze. You don’t place a big bet. So I expect we’ll see the same sort of level we’re at rather than real growth.”

It will come as no surprise that the speed bump currently frustrating American small businesses is also tripping up their counterparts in the rest of the English-speaking world.

In the U.K., a survey by an online insurance quote comparison service called Constructaquote.com is said to show that 78% of small business owners have not seen any increase in business. Nearly two-thirds were either unsure or not optimistic about their growth prospects over the next 12 to 18 months.

The Toronto Globe and Mailreports a petering-out of optimism among Canadian small businesses similar to that found in the U.S. by the Discover survey. And in Australia, the Sydney Morning Herald has advised that country’s “fragile” small and midsize sector to expect rising interest rates for business loans for the next five years.

It ought to shake the faith of any small business owner in his or her decision to launch the company in the first place—but that’s not what is happening in the U.S.

“The shape of the economy over the past two years apparently hasn't had a huge impact on the American entrepreneurial spirit,” says the Discover survey, adding that “53% of small business owners would not take a job for the same or more money, and fewer owners than last year would make the switch.” Despite the fact that a majority of small business owners see running their businesses as riskier than working for a large company, most wouldn’t trade being their own bosses for whatever security there might be in working for somebody else.