Business Owners’ Glass Half-Full, for Now

02/14/2012 11:26 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

Sentiment has improved from summer lows to levels not seen since early 2011. But the going gets harder from here, writes senior editor Igor Greenwald.

The latest National Federation of Independent Business survey of small businesses is out today, and it’s got something for everyone.

Optimists will celebrate news that small business owners are not the near-suicidal lot they were five months ago, responding to the recent uptick in sales.

The headline “optimism index” number inched up to its highest level in 11 months, its fifth straight increase. Other than last year’s first two months, the index was at its highest level since the end of 2007.

The net percentage of business owners anticipating better business conditions in six months recovered from -26 in August to -3, a ten-month high. The majority of business owners deemed this a good time to expand, and 18% had unfilled job openings, the highest proportion since September 2008.

On the flip side of the coin, sentiment remains depressed at absolute levels associated with past recessions. A significant majority of small-business owners (by a margin of 24%) continued to report lower earnings over the most recent three-month period than in the prior three-month stretch.

Sales volume was the most popular explanation and low sales continued to be cited as the single most important problem, albeit by a notably smaller percentage of business people than a year ago.

NFIB chief economist William Dunkelberg doesn’t want anyone to count on further improvement, given the political impasse in Washington. “The prospects for resolving the major uncertainties facing small business owners in 2012 are low,” he noted in commentary accompanying the survey.

“Government spending surges ahead, undisciplined without a federal budget for over 1,000 days, which is no way to run the largest ‘business’ in the world, USA, Inc. Tax issues remain unresolved and spending issues unaddressed.”

Perhaps not every business owner out there is hankering for spending issues to be “addressed,” seeing that state efforts to “address” budgetary shortfalls are among the main drivers of the disappointing sales. In any case, small business owners making less money than before are unlikely to rush expansion plans in the face of major tax uncertainty, whatever their biases.

There’s no denying that the ship of state remains adrift and headed for the rocks of austerity in less than a year without an improbable grand compromise ahead of an election.

But all of this was true five months ago too, and the genuine economic improvement since in the face of incessant headline risk remains the most important recent development.

There may be progress on the sales front as well. Retail sales for January rose 0.4%, disappointing expectations largely because of a surprising drop in auto sales. But sales excluding autos rose a surprisingly strong 0.7%, the most since March. General merchandise stores saw a 2% increase, while sporting goods, hobby, book and music stores registered a gain of 1.4%.

Discretionary consumer spending looks strong for now. What it will look like if gas hits $4 a gallon, and as budget cuts and tax hikes close in, is another matter.

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