Small business owners are more optimistic about their prospects than at any time since the before the Great Recession, a new survey shows.
The National Federation of Independent Businesses' Optimism Index rose 1.4 points in May to 96.6, the third straight monthly gain and its highest reading since September 2007. "This is one of the best readings since mid-2007, with the exception of a few months in early 2012 when the economy made an attempt to pick up the pace of economic growth," the trade group said.
Several trends point to better days ahead for small businesses, according to the NFIB. Although rising labor costs are keeping pressure on earnings, profit trends are improving. That is persuading at least some small business owners, who saw revenue plunge following the 2008 financial crisis, to start hiring again.
Seasonally adjusted employment increased by an average 0.11 workers per firm in May, according to the survey, the eighth consecutive positive reading and the longest string of monthly gains since 2006. The percentage of small businesses planning to add workers rose 2 points to 10 percent in May.
Smaller firms are also finding it easier to get credit. Only 5 percent of small business owners said they couldn't get all their credit needs met last month, while 30 percent reported being able to get a loan. Meanwhile, only 3 percent reported that financing was their top business problem, far fewer than the percentage of small businesses that cited taxes and government regulation.
Twelve percent of firms mentioned weak sales as their main challenge, highlighting the economy's modest growth this year. But a growing share of small business are reporting a rise in sales.
"Overall, owners are hinting at better business conditions and sales prospects, but not much movement in the needle yet," the NFIB said.
"This is a good report," Chris G. Christopher, Jr., director of consumer markets for IHS Global Insight, said in a client note. "Small business optimism is gaining traction and clearly coming out of the ditch. Looking ahead, we believe that small businesses are likely to stay at relatively elevated levels and start playing a stronger role in the national economy."
Not that small businesses are out of the woods. Many firms feel hindered by taxes, regulations and a lack of credit, Christopher noted. Some small businesses also say the Affordable Care Act is inhibiting their growth. And as a whole smaller enterprises were among the hardest-hit segments of the economy during the recession, with many still trying to climb out of debt and rebuild wealth.
Not surprising, then, that NFIB chief economist William Dunkelberg added a note of caution to the group's latest sentiment reading.
"[T]he four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May," he said in a statement. "So the entire gain in optimism was driven by soft components such as expectations about sales and business conditions."
"With prices being raised more frequently in response to rising labor and higher energy costs, it is clear that small businesses are unwilling to invest in an uncertain future," he added.
That uncertainty is crimping capital spending, which fell last month. The percentage of businesses reporting outlays in May dropped 2 points, to 55 percent. Overall, spending was a bit weaker than April, although in line with recent readings. The percent of owners planning capital outlays in the next three to six months fell 1 point to 24 percent, according to the NFIB.