PRINCETON, NJ -- The Wells Fargo/Gallup Small Business Index, a measure of small-business owners' perceptions of their operating environments, changed direction in November prior to the extension of the Bush tax cuts -- surging 24 points to -4. This represents a sharp improvement from the previous reading of -28 in July and suggests that small-business owners -- though still more pessimistic than optimistic overall -- are the most positive they have been since April 2009.
The Small Business Index tends to be a precursor of future economic activity. It peaked at the end of 2006 and matched that peak in June 2007, just prior to the beginning of the recession late that year. The index consistently declined through 2008 and into mid-2009, which economists designated as the point when the recession was officially over. It improved modestly for the next three quarters as the economy recovered more slowly than anticipated, before establishing a new bottom in July 2010. In the latest reading, the index has recovered significantly, possibly marking another inflection point for the U.S. economy.
Future Expectations More Positive in November
The Future Expectations Dimension of the index led the overall improvement seen in November, as it surged 17 points to +15. Small-business owners' expectations for the next 12 months are now the most positive they have been since July 2008.
Specifically, small-business owners' expectations for the next 12 months improved significantly in terms of revenues, cash flow, capital spending, and hiring. At the same time, the percentage of small-business owners expecting their financial situations to be somewhat or very poor over the next 12 months fell significantly, from 22% in July to 17% in November.
Present Situation Improved but Still Negative
Overall conditions as reflected by the Present Situation Dimension of the index remain negative, at -19 in November, compared with -26 in July. Still, small-business owners are currently more positive about their present operating situation as a result of a significant improvement in the percentage saying their revenues increased over the past 12 months, combined with improvements that are more modest in other aspects.
Several factors may help explain small-business owners' greater optimism in November, including the aggressive efforts of the Federal Reserve in providing liquidity to the economy and some potential post-midterm political optimism.
The sharp improvement in small-business owners' economic perceptions and expectations in November is consistent with Gallup tracking of consumer-based economic confidence that also improved in early November. And it parallels Gallup's November estimates for Christmas sales.
In this regard, it should be noted that Gallup's economic confidence measure suggests that November's consumer optimism moderated somewhat in early December. Whether this decline in confidence will affect small-business owners' perceptions of the economy in the short term or after some potential lag is not clear.
However, Congress' December passage of new tax and unemployment benefits legislation could significantly improve Americans' overall optimism about the future direction of the U.S. economy. This may in turn further significantly enhance optimism among today's small-business owners.
See complete data and trends from the Wells Fargo/Gallup Small Business Index on page 2.
Results for the total dataset are based on telephone interviews with 604 small-business owners, conducted Nov. 4-10, 2010. For results based on the total sample of small-business owners, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points.
Sampling is done on a random-digit-dial basis, using Dunn & Bradstreet sampling of small businesses having $20 million or less of sales or revenues. The data are weighted to be representative of U.S. small businesses within this size range nationwide.
In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.
For more details on Gallup's polling methodology, visit www.gallup.com.