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A Story of Caution and Fear for Small Businesses

Deborah Caldwell|Senior Editor, Enterprise
Tuesday, 7 Aug 2012 | 8:06 AM ET

Small businesses are less inclined to hire or to spend on growing their businesses than they were earlier in the year, according to the latest Wells Fargo/Gallup Small Business Index.

“Small businesses have grown a bit more concerned in the last couple months because of the uncertainty engulfing the economy,” according to Mark Vitner, senior economist at Wells Fargo . “The findings we saw here are very consistent with what we’ve been seeing and hearing anecdotally: The economy is getting a little bit better, but not a whole lot better. So there is no compelling need to expand right now.”

The quarterly survey’s latest statistics tell a story of caution, even perhaps fear. The number of business owners expecting to be in a good financial position in the next 12 months declined seven percentage points to 59 percent. Meanwhile, those expecting increased revenue in the next 12 months declined by six percentage points to 43.

Separately, the July NFIB Small Business Survey report shows that small business optimism is at its lowest level since October 2011.

Yet there was some contradictory good news in the Wells Fargo survey. Despite the decline in the index score this quarter, business owner optimism has improved significantly from the recession’s(explain this) low point, when the index dipped to minus 28 in the third quarter of 2010. There was also an uptick in plans to invest in technology, particularly mobile devices, among those owners who do plan to make capital investments in the next year. Purchase rates for newer tech devices, such as smartphones and tablets, have steadily increased year-over-year, while investments in older technologies, such as cellphones and desktop computers, are flat or declining.

Vitner said business owners tell him they would expand if they could get access to capital; for small businesses, that usually means funding expansion through extra profit more often than it means funding through borrowing. Vitner said the bank isn’t seeing nearly as many requests for small business loans as it has in the past.

"For many businesses, their growth prospects are lost in a fog of uncertainty. You can drive in the fog, but you can't drive that fast." -Senior Economist, Wells Fargo, Mark Vitner

“Business activity fell off sharply during recession, and there’s been very little recovery,” he said.

The uncertainty arises from various factors: Europe’s financial crisis, the so-called Fiscal Cliff, and general political uncertainty surrounding the presidential election.

“Europe is part of it because they may sell overseas or sell to someone overseas,” Vitner said, “but the larger issues are tax and regulatory policies.”

Until Congress works out a tax deal that prevents the Fiscal Cliff on Jan. 1, 2013, small business owners have said they are too afraid to spend or hire because they don’t know what the tax implications may be. Meanwhile, Vitner said he hears small business owners consistently concerned that the current regulatory environment is too stringent.

President Barack Obama has launched several initiatives aimed at helping businesses, such as Startup America and his Council on Jobs and Competitiveness. And last month, the White House launched a website to gather tips from businesses on burdensome regulations.

“For many businesses, their growth prospects are lost in a fog of uncertainty. You can drive in the fog, but you can’t drive that fast,” Vitner said. “Once we get past the election and the Fiscal Cliff, the clouds will be removed and people will be able to plan.”

The Wells Fargo/Gallup Small Business Index has surveyed small business owners since August 2003. The index consists of two dimensions: owners’ ratings of their current situation; and owners’ ratings of how they expect their businesses to perform over the next year. The results are based on telephone interviews with 600 small business owners in 50 states, in this case conducted July 9-13. The margin of error is plus or minus four percentage points.

Email us at SmallBiz@cnbc.com and follow us on Twitter @SmallBizCNBC.

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