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Wells Fargo Securities Economics Group: After Some Trepidation, Small Business Confidence Rebounds

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.

Wells Fargo Small Business Survey - Overall Situation Chart, Wells Fargo Small Business Index - Percent Expecting Change in Jobs in Next 12 months, Wells Fargo Small Business Index - Expect Cash Flow to be


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