Small Business confidence has been on a very slow rise for the past 6 months, reports the National Federation of Independent Businesses (NFIB). Using the Small Business Optimism Index, the NFIB gauges how small businesses feel in the current economic climate. Such a gauge is helpful and fascinating, but we are left to ask: what constitutes small business confidence?
While confidence seems like an ephemeral feeling, industry measures suggest that this confidence is actually quantifiable. The NFIB uses these measures to compare how businesses are faring (and their outlook on the future) between now and past times. To better understand, let’s walk through the NFIB’s numbers and explore what makes businesses look more or less confident.
How Can Small Business Confidence Be Quantified?
The Small Business Optimism Index is a general benchmark determined by a series of individual measures, which we will look at in greater depth. As a (very loose) analogy, the index is akin to a school test grade. You may have scored higher in some sections and lower on others, and you ultimately end up with an aggregate score.
The Small Business Optimism Index works in a similar way, combining high and low measures. For example, in February 2012, the index increased 0.4 points to a total of 94.3 points. However, this score does not indicate a blanket improvement. While owners became more optimistic about future sales growth, they also felt more pessimistic about the outlook for business conditions. To see where the index scored lower and higher in different places, check out Bloomberg’s pithy table.
With all these ups and downs, the index is an important general number, but you need to take a closer look to see the real picture.
A plan to hire more employees intuitively suggests small business confidence. After all, you wouldn’t invite more people to a party if you think it will be boring. As of now, the employment measure suggests ambivalence about the future. In March, 12 percent of small business owners added an average of 3.4 employees. This sounds good, but 14 percent reduced employment by an average of 2.4 workers.
Note that employees overall seem to be earning more money. While 3 percent of small business reduced worker compensation, 19 percent actually raised compensation. Increased compensation suggests higher profits, which is a boon to employees and employers alike.
Small business owners may be hiring less than they would like. According to the NFIB, 42 percent of owners tried to hire in the last 3 months, but 32 percent of them claimed they could not find qualified applicants. Finding the right employees is an issue for many small business owners, and such a challenge may inhibit small business confidence.
Inventory and sales
More than 1 out of 5 small businesses have been reporting “poor sales” as their top business problem. This self-report follows the current sales trends, as sales are generally trending down. Nonetheless, more small business owners are optimistic about gaining sales. The NFIB suggests this may be a result of small businesses adjusting their inventory levels.
This assessment makes sense, since small businesses that see their product stocks diminishing will likely feel more positive about sales. With this boost in confidence, more firms will begin adding to their stocks, which hopefully means more business transactions in the future.
Capital and credit markets
Businesses may report different levels of confidence depending on their access to credit. Despite the banks’ tight grip on credit, only 4 percent of small businesses report financing as a primary problem, and 31 percent of businesses report that their credit needs are satisfied. Nevertheless, business owners believe that accessing credit will be more difficult in the future.
While businesses have adequate access to credit, they have also been spending more on capital outlay. (These statistics may be related, as many small businesses use credit to build capital). This hopefully suggests general growth and confidence.
While there is no clear-cut “up” or “down” with regard to small business confidence, these numbers provide a lot of helpful information for your own small business. Try reviewing your own employment, inventory and sales trends. Using these statistics, you can get a somewhat empirical gauge on your small business’ confidence, and see where there is room for improvement.