Why did small business optimism take a dive in June?

Small business owners turned pessimistic and much less confident as economic conditions in June fell to its weakest level in more than a year. Prospects of weaker profits and a softening labor market could temper expectations for stable economic growth in the second half of the year. When surveyed, over 600 small business owners said they had limited expectations for sales and business conditions so they planned to expend less revenue. Coming on the heels of a slowdown in automobile sales and disappointing June employment report, the downbeat confidence report could boost concerns that the economy has suffered loss of momentum at the end of the second quarter.

Top Three Concerns

While this doesn’t signal a recession, it is a clear warning sign that strong economic growth is not predicted anytime soon. In fact, small business owners were less confident about hiring new workers, investing in their business or expecting growth in June. The findings contrast other indicators of small business growth. For instance, over 120,000 jobs were added by small firms in June. Even though this was a slight drop from the previous month, it was still significant. In recent years, the index has declined in June, although nowhere near the degree it did this year. There is hope for a rebound next month, but the index reverberates the findings of a poll from the beginning of the year. In that survey, it was found that enthusiasm among small business owners fell in the second quarter, mainly due to lower sales. Among the top three concerns expressed for the decreased levels of confidence were:

· Increased taxes

· Elevated inflation rates

· Decreased sales

Economic indicators, including jobless claims and consumer confidence, have remained stable, so the unexpected drop in the index could be seasonal.

Economic Environment Expectations

It is probable that inflation pressures might remain constant and benign even in the wake of small business owners’ earnings expectations weakening sharply and their views on sales deteriorating even further. The latest Index scores reveal that although some small business owners have more financial stability than a year ago, many continue to face challenges in the current economic environment. A slump in profits can influence perceptions of current conditions and temper optimism for the year ahead, leading to decisions such as:

· Pessimism about investing in capital and inventories

· Eliminating any plans for expansion

· Declining to hire workers

· Difficulties finding workers for open positions

The index decline is not a disaster, but rather a massive setback and a failed attempt to strike a firm growth path. The weakness was considerable and felt across all industries and showed no indications of a growth spurt anytime soon.