Did Washington D.C. Make the U.S. Pessimistic?

With Washington bickering over issues such as the fiscal cliff and debt ceiling, pessimism among small business owners remains near the worst levels in recorded history.

The National Federation of Independent Business, the leading nonprofit small business association representing small and independent businesses, said its Small Business Optimism Index edged 0.50 points higher to 88.0 in December, compared to 79.5 in the previous month. The November sentiment was the eighth worst reading since the organization started keeping track of the monthly index in 1986.

Although Congress eventually reached a mini-deal on the fiscal cliff, which includes raising taxes and delaying spending cuts, the game of chicken between the two political parties did not help businesses feel better. Higher taxes across the nation also serves as a headwind for economic activity.

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Bill Dunkelberg, chief economist at the NFIB, explains, “Congress played chicken right up to the end of the year, leaving small-business owners with no new information about the economy’s future—no sense of how much their taxes would increase or if the economy would go over the now infamous cliff. The eleventh hour ‘deal’ has brought marginal certainty about tax rates and extenders and will provide some relief to owners, but it certainly doesn’t guarantee a more positive forecast for the economy.” He also adds, “And let’s not forget what is looming on the horizon: a debate over the debt limit and a regulatory avalanche of historic proportions about to spill out into the country. Happy New Year.”

The December Optimism Index is at its second-lowest level in over two years…

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The current reading of 88.0 is better than the 81.0 low in the trough of the Great Recession, but it is still the second worst reading since March 2010.

Naturally, job creation plans decreased 4 points in December and only a net one percent of owners plan to increase employment in the coming months.

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While many economists define the recession as being over, the NFIB explains the current pessimism is not typical during a recovery. A whopping 70 percent of owners surveyed said it was a bad time to expand their business, while one in four blame political uncertainty as the top reason.

In fact, Washington holds the top two reasons for the most important small business problems…

As the chart below shows, taxes and regulations account for the top small business problems at 23 percent and 21 percent, respectively. The two issues are slightly higher when compared to the prior year and well off survey lows. Many of the other problems stayed the same or improved from one year ago.

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Dunkelberg explains, “There is no way we can avoid ‘going over the cliff’ in some form or another. Spending must slow and taxes will rise. New income tax rates are now set, but there are many more ‘hidden’ taxes. There will be reductions in spending somewhere, and that’s a reduction in incomes for some workers and firms. Whatever the resolution of the ‘cliff’, it will not provide a stimulus unless it somehow turns out to be a very sensible bargain which makes consumers and owners more optimistic about the future. Health care costs are rising as well.”

The pessimism from small businesses echo the confidence levels among other Americans…

According to a Gallup poll, American economic confidence outlook fell to negative 18 in the week ending January 6, 2013. This is significantly lower from negative 1 seen in early November. Thirty-nine percent of Americans say the economy is getting better, but 57 percent say it is getting worse.

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Meanwhile, the current conditions rating fell from negative 18 to negative 24, with 40 percent of Americans saying the economy is poor and only 16 percent saying the economy is in excellent or good condition.

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