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Small Businesses Remain Uneasy About “Fiscal Cliff”

 December 04, 2012 09:41 AM

(By Mani) All eyes appear to be focused on the "Fiscal Cliff" and its impact on the economy and various classes of business organizations. In the current scenario, small businesses remain extremely cautious with their plans for 2013.

The Wells Fargo/Gallup Small Business Index tumbled 28 points during the fourth quarter to -11 as businesses became increasingly worried about next year's financial prospects. The 28-point drop is the largest decline since the fourth quarter of 2008, when the index fell 35 points.

The 2008 survey period also included the presidential election but was also weighed down by concerns surrounding the financial crisis. Moreover, the previous drop was nearly evenly split between worries about current conditions and the future, which was understandable given the nearly unprecedented deterioration in financial conditions during that period.

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"Today's concerns are primarily about 2013 and all of the uncertainty surrounding how tax and policy changes will impact sales and operating expenses," Wells Fargo economist Mark Vitner wrote in a note to clients.

While less impacted, small business owners' views on current business conditions still deteriorated slightly during the most recent quarter, with the percentage of firms stating that their current financial situation was either very good or somewhat good slipping 2 points to 51 percent.

The share of firms reporting that their current financial situation was either somewhat poor or very poor rose by a similar magnitude, climbing 2 points to 28 percent. The remainder noted that financial conditions were average.

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The proportion of small businesses stating that revenues increased fell for the second consecutive quarter, falling 2 points to 29 percent, while the proportion stating that revenues decreased rose 6 points to 44 percent.

"Despite 71 percent of small businesses reporting that revenues were either unchanged or down for the quarter, views on cash flow were essentially unchanged, which suggest that businesses maintained a tight rein on expenses and remain less willing to hire or invest in new equipment," Vitner wrote.

Along that line, more than twice as many firms said they decreased capital spending than said they increased it, marking the 18th consecutive quarter that more firms said they reduced capital spending than increased it.

Meanwhile, the most jarring result is how expectations for future revenues and cash flows have deteriorated. The proportion of small businesses stating that they expect their revenues to decrease over the next 12 months jumped 11 points in the fourth quarter to 29 percent while the proportion expecting revenues to increase fell 6 points to 37 percent.

"Expectations for cash flows deteriorated by a similar magnitude, with those expecting their firm's cash flow to be somewhat poor or very poor rising 7 points to 30 percent and those expecting cash flow to be very good or somewhat good sliding 7 points to 44 percent," Vitner said.

Combined, the deterioration in these two series suggest that businesses have doubts that they will be able to find additional cost savings to offset slower revenue growth and increased expenses. This means many small businesses will remain exceptionally cautious about adding to workers or purchasing equipment as we move into the New Year.

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