Source: Wells Fargo Securities Economics Group
The Wells Fargo/Gallup Small Business Index rose 20 points in early
January, as businesses expressed less concern about current business
conditions and slightly more optimism about expectations for the coming
year. The 20-point rise follows a 28-point drop during the fourth quarter,
which marked the largest quarterly decline since the fourth quarter of
2008. The partial recovery from that fourth quarter plunge suggests that
worries over the fiscal cliff were likely a little overdone late last year. We
noted then that most of the fourth quarter’s drop was in the expectations
components and that current conditions were still improving. The most
recent report shows improvement in both series, with the present situation
series rising 8 points to -2 and the future expectations component climbing
12 points to +11.
Even with the 20 point rise, the overall index remains exceptionally low,
suggesting that many businesses remain concerned about changes to the
tax code and the ongoing debate about fiscal policy. In such an
environment, businesses are likely to continue to tread lightly when it
comes to investing in new plants and equipment or hiring additional
workers. The trend is in the right direction, however, and this is evident
across most of the survey’s key components. The proportion of firms stating
that they reduced their workforce during the past 12 months fell to
22 percent in the first quarter from 26 percent previously. Even fewer
firms, just 12 percent compared to 21 percent a quarter earlier, state that
they intend to reduce employment over the coming year.
The proportion of businesses stating that revenues have improved during
the past year also increased, climbing from 29 percent in the fourth quarter
to 36 percent currently. More businesses also expressed optimism about
revenues in the coming year, with 43 percent expecting their revenues to
increase versus 37 percent during the previous quarter. With revenues
increasing, businesses are expressing more confidence about their future
cash flow and overall financial situation. The proportion of firms expecting
their cash flow to improve during the coming year rose to 49 percent, up
from 44 percent the previous quarter, while 57 percent of firms expect their
financial situation to be good or somewhat good one year from now, up
from 50 percent a quarter earlier.
The rebound in small business confidence is reassuring following the sharp
fall-off late last year. Many business owners remain concerned about the
recent changes to tax and regulatory policy and are focusing intently on
protecting their operating margins by controlling costs and expanding
much more cautiously than in the past. In this environment, capital
spending and hiring will likely continue to grow modestly.