Small Business Sentiment Falls in December

Small business sentiment deteriorated in December, posting its second lowest reading in 35 years, highlighting the worst post-war economic climate that has seen a dramatic cut back in consumer spending.

The National Federation of Independent Business (NFIB) said on Tuesday its small business optimism index fell 2.6 points to 85.2 in December, the second lowest reading in the survey's 35-year history.

The last time the index was near these levels was in 1980, whenit fell to 80.1 in February. The survey was conducted through December 29 and covered 805 businesses.

"Owners, particularly retailers who make their year in the fourth quarter, were hoping that consumers would once again ride to the rescue. It didn't happen,'' said William Dunkelberg, chief economist at the NFIB.

"Profit trends are terrible, and since 80 percent of small business costs are typically compensation costs, owners had no choice but to trim jobs.''

The collapse of the U.S. housing market and the resulting global crisis has left the world's largest economy mired in a recession since December 2007.

Analysts reckon the current economic downturn has potential to be the longest since the contraction seen in 1981 that lasted 16 months.

Confronted with massive jobs losses and an uncertain economic outlook, households have sharply cut back on spending. That pull back, together with tight credit conditions, has hit businesses hard, resulting in more layoffs.

About 2.6 million people lost their jobs in 2008, the largest slump in employment since 1945. The U.S. jobless rate is at 7.2 percent, the highest in almost 16 years.

The NFIB survey found that about eight percent of small businesses that took part in the poll planned to create new jobs over the next three months, while 19 percent were looking to cut their workforce.

Fewer businesses planned to make capital expenditures over the next few months, the survey found.

"In this uncertain environment, owners are postponing any capital projects that are not essential to the operation of the firm or that they can't afford or can't finance,'' said Dunkelberg.

The sharp slowdown in demand had restrained businesses' ability to raise prices, the survey found, with only a net three percent of businesses saying they had plans to raise them.

The number of businesses reporting declining earnings trends outnumbered those with gains by 42 percentage points, the worst showing in 35 years, according to the survey.

Seven percent of businesses reported cutting worker compensation, double earlier months and a survey record high, while 12 percent reported raising wages, a survey record low.

"Unless there is a solid turnaround in the index in January, we are in for a longer than usual recession period,'' said Dunkelberg.

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