Index of Small Business Optimism and the Aggregate Demand Dilemma

The National Federation of Independent Business Index of Small Business Optimism increased 1.6 points in May with a reading of 92.2. The analysis states that although this is not a strong sign of recovery, it is nevertheless headed in the right direction. It is recorded as the best reading since September 2008. A look inside the report reveals that only one percent of small business owners plan on increasing employment, but this is still better than in April. An important insight into how this recessions recovery compares (lags behind) to those of the past:

"Since the third quarter of 2009, job creation plans have seriously underperformed the recoveries from the other two deep recessions covered by the NFIB survey. Coming out of the milder 1991 recession, construction added more than 100,000 jobs and 20,000 new firms in a year's time."

Credit conditions are of special interest in the report and point to very slow improvement. A net 13 percent of NFIB members reported loans harder to get than in their last attempt, which is down one point from April. The main reason for small businesses owners not hiring or expanding their business is because of the lack in aggregate demand as ninety-two percent of the owners reported all their credit needs met, or they did not want to borrow.

"Very weak plans to make capital expenditures, to add to inventory and to expand operations make it clear that many good borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory and take out the usual loans used to support these activities."

The report makes the claim that what businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities. Indeed, thirty percent cited weak sales as their top business problem, which is up one point from April.