Small-Business Owners Cut Spending, Jobs as Revenues Fall

Small-business owners were far less optimistic at the end of 2008 than at any time over the past five years. The Wells Fargo/Gallup Small Business Index, which measures small-business owners' perceptions of their operating environments, plunged to a score of 10 -- down from 45 in the third quarter and its lowest level since the inception of the Index in the third quarter of 2003. Two years ago, the Index reached its peak of 114, while last year at this time it stood at 99.

Declining Revenues

Thirty-one percent of small-business owners say their revenues increased over the past 12 months while 47% say their revenues decreased. This difference of -16 points is down from +2 in the third quarter, -2 in the second quarter, and +13 in the first quarter of 2008. The damage surging gas prices did to small-business revenues last spring and summer seems to have been exacerbated by the consumer credit crunch in the fourth quarter.

Less Capital Spending

With revenues declining for nearly half of small-business owners, many owners have cut back on their capital spending on such things as computers, machinery, and facilities, with only 21% saying they have increased such expenditures in the last year and 39% saying they have decreased them. This difference of -18 points is down from -7 in the third quarter and +9 as recently as the first quarter of 2008.

Cutting Jobs

Falling revenues have also forced small-business owners to cut jobs. Only 11% say they have increased the number of jobs at their companies over the past 12 months while 27% say they have decreased them. This difference of -16 points is down from -8 in the second and third quarters, and +4 in the first quarter of 2008. The small-business job situation is now far more negative than at any time since measurement began during the third quarter of 2003.

Commentary

The sharp deterioration in small-business owners' economic perceptions at the end of 2008 is totally consistent with Gallup's other economic measures showing a plunge in consumer confidence and increasing job losses. It also serves as a reminder that while the financial difficulties facing large companies and the related job cuts make the headlines, America's small businesses are also struggling with the current economic environment.

In this regard, President-elect Obama and his economic team should think carefully about what role they want small business to play in their "bottom-up" stimulus effort. If the goal is to save existing jobs and create new ones, small business -- as the major source of private-sector job creation -- needs to play a major role. The trick will be for the new administration to find ways to help small business reverse its job-shedding and capital-spending-reduction habits of 2008, and in doing so, help spur the larger economic recovery.

As 2008 came to an end, there was a lot of focus on too-big-to-fail companies and the need to preserve the jobs they provided. As the new stimulus plans are developed to help these companies and create jobs in 2009, the nation's small businesses and their role in job creation should not be forgotten.

Source- Gallup