Small Business Optimism Falls to 1993 Low

Small business confidence in the U.S. economy tumbled for the second straight month in November because of worries that economic growth will slow, a survey released on Tuesday showed.

The National Federation of Independent Business said its index of small business optimism fell 1.8 points to 94.4 in November from October to its lowest since 1993.

After the Sept. 18 Federal Reserve rate cut, small business firms cut spending and hiring plans, the NFIB said. Small business expectations weakened further following a second rate cut in October and forecasts for slower economic growth.

"Things were looking good on Main Street until the Fed warned that the economy was at risk of sinking," said NFIB Chief Economist William Dunkelberg.

"That warning had credibility, and the logical response was to cut hiring, capital spending and other growth-related activities," Dunkelberg said. "And indeed that occurred in the last 12 days of September and continued into October and November."

Wall Street widely expects the Federal Reserve to cut the benchmark federal funds rate on Tuesday, probably by 25 basis points. The rate now stands at 4.50 percent.

The cut in interest rates will do little to spur new home construction with such an overhang of supply, he said.

"The recovery of new home construction is likely to be very uneven as most of the overbuilding occurred in a few geographic areas such as California, Florida and Las Vegas, where foreclosures are very high, Dunkelberg said.

"High foreclosure rates in Michigan and Ohio are due more to a weak economy than overbuilding," he said.

During the next three months, 11 percent of the owners polled by the group say they plan to create new jobs, unchanged from October, but 3 points below September, NFIB said.

Thirteen percent of the owners said the availability of qualified labor was their top business problem, down a point from October, the group said.

Plans to make capital expenditures during the next few months were unchanged at 27 percent of all firms, while 13 percent of the owners said the current period is a good time to expand facilities, down 1 point from October.

Profits do not appear to be improving, even with a fairly high percent of firms raising prices, NFIB said.

The rise in "softer profit growth could simply be a result of the fact that third quarter economic growth was exceptional, so a return slower, more normal growth eliminated some of the profit associated with higher than normal GDP growth," Dunkelberg said.