NYC Small Businesses More Optimistic than National Survey

Regina Katopodis of Artopolis in Astoria

The National Association of Independent Business (NFIB) publishes its Small Business Optimism Index monthly. When the latest report reached the wire in January it showed business was better in December, but it was not good in absolute terms. In addition to reviewing and analyzing the national report, I determined to survey small businesses in New York City to enhance our perspective of the situation within America’s largest metropolis. I was a bit surprised by some of the responses to my survey.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The NFIB Small Business Optimism Index for December 2012 improved over November, but it did not reflect positive sentiment at the close of the year. The latest report showed the index edged up by a half of a point to a mark of 88.0 in December. At that level, the index was still at its lowest point since March of 2010. Our own survey of New York City business people turned up a notably higher level of optimism.

Obviously, uncertainty about the economy prompted by the fiscal cliff fiasco and Congressional dysfunction is what pinched the perspective of small businessmen at the close of the year. Direct tax consequences to businessmen and an indirect potential impact to the economy hinged upon developments in D.C. Bill Dunkelberg, the chief economist of the NFIB, noted that the next survey measuring January sentiment will shed light on the level of satisfaction of small businessmen with the midnight hour deal. Indeed, stocks have been on a tear since, with the SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrials (NYSE: DIA) and PowerShares QQQ (Nasdaq: QQQ) each posting mid-single digit gains year-to-date.

However, Dunkelberg warned that economic uncertainty continues to exist due to the debt ceiling and a “regulatory avalanche.” While the debt ceiling issue has been mitigated for now, budgetary battles lie ahead throughout the spring, and a potential government shutdown looms as well. If the government doesn’t put a budget together by March 1st, some $50 billion will be cut from the Pentagon defense budget through sequester. Judging by the performance of the SPDR S&P Aerospace & Defense (NYSE: XAR), there’s little fear of that actually happening. The XAR is up 5.6% year-to-date.

The NFIB subtitled its press release this month, One of the Lowest Optimism Readings in Survey History. Indeed, it reflected a significant degree of pessimism, just up slightly from November’s historic low mark. The NFIB noted that December’s reading was more indicative of a recessionary period than one of growth. The details of the data revealed that the index was hindered by deteriorated labor market component measures and the great degree of small businessmen nationally who expect operating conditions to worsen over the next six months.

The NFIB indicated that 70% of business owners surveyed characterized the current period as poor for expansion. Obviously, the issues worrying small businessmen these days are plentiful. Some of the more important issues, according to the NFIB data, are political uncertainty (25%), taxes (23%) and regulations (21%). Obviously taxes matter to everyone, but our group of respondents in New York did not really get caught up in the media hoopla around the fiscal cliff. I believe most Americans didn’t know or understand the details of what made the fiscal cliff so frightening, and I expect many were spared heart problems because of that. I believe this is also the reason why consumer sentiment showed little sign of concern up until the midnight hour, and why the Consumer Discretionary Select Sector SPDR (NYSE: XLY) and the SPDR S&P Retail (NYSE: XRT) held up so well up until the final two weeks of December.

Sales Patterns

Obviously, the macro issues discussed above are out of the control of small businessmen and are anecdotal. However, small business people are intimately tied to their sales results, and 19% of those surveyed said “poor sales” were their toughest challenge. The NFIB reported that just 18% of business owners surveyed saw higher sales over the last three months, while 30% reported lower sales results. One might say that when Apple (Nasdaq: AAPL) product sales disappoint Wall Street, we shouldn’t expect much from small businesses, but Apple’s disappointment extended into market share and margin issues as well as growth questions. In any event, the environment has not been conducive to blockbuster business, but things seem to be changing. We’ll know a little more about that this week when we may face an economic reality check.

Obviously through the seasonal period, these data are going to vary for different types of businesses. So we asked our group about the near-term trend and about sales against the prior year. Most indicated they saw just modest increases in sales growth, which matches the malaise generally experienced by business people over the last several years, given the slowly recovering economy. A representative of Mike's Diner, an iconic spot in Astoria, New York indicated, "Sales are increasing, but it has been at a snail's pace. The economy is moving in the right direction, just very slowly." Indeed, even the largest of restaurateurs have struggled of late, with McDonald’s (NYSE: MCD) facing up against the better burger threat in its U.S. market and the weak economies of Europe.

Consumer spending was reported weak by the NFIB, though the organization said auto sales were an anomaly, having recently showed some strength. Of those business owners surveyed by the NFIB, 20% expect sales improvement over the next three months, while 40% expect decline on a non-seasonally adjusted basis. Within our NYC group, the views ranged from modest growth to a bit more than that. Shelley & Nikoletta at Kentrikon & Noufaro, a wedding and other special events store in Astoria, New York, said, "We see people coming in earlier than usual this year, with orders already being booked. This bodes well for a good spring season, and has us optimistic about the year."

Hiring Patterns

Hiring patterns are of course critically important to our broader economy. We reported recently that the true unemployment rate is likely closer to 11.7% than the reported 7.8%; underemployment is more likely 17.9% instead of the reported U-6 figure at 14.4%. Small businesses employ the majority of Americans, and so their hiring plans are of critical importance to the economy.

The NFIB reported that 41% of business owners hired or attempted to hire employees over the last few months, but that includes for replacement purposes. Employees per firm only increased by a tiny 0.03 people per firm, with just 11% of the business owners saying they added an average of 2.9 workers per firm over the last few months. Some 13% of those surveyed reduced employees by an average of 1.9 workers while 76% made no change. Large and small, the employment environment remained soft through the fourth quarter of 2012. Citigroup (NYSE: C) was among notables making significant layoffs in the quarter.

What’s most important to our readers here is the forward hiring plans of businesses. The NFIB reported a disappointing bit of news on this front. On net, small businesses projected just a 1% increase in employment in the months ahead. Before seasonal adjustment, 7% of business owners plan to increase employment in the months ahead while 11% plan to reduce their workforce.

In our own survey, we discovered that some small businessmen are supporting margins on soft sales by getting more out of employees. It’s not an unfair burden being placed on busy workers, but an effort to keep wage earners busy; it’s a best use of capacity really and smart business. In some cases, rather than increasing workforce during busy seasonal periods, employers are allowing their own workforce to earn more for carrying a higher workload. This may be in compensation for fewer pay raises than during economic boom periods, but that’s just speculation on my part. Of our New York City survey group, we found very few businesses adding to their net workforce count, except for seasonal reasons.

Credit Patterns

Credit availability has improved as the economy has begun to find its way. However, the NFIB said approximately 65% of its survey respondents were disinterested in new debt funding. Only one percent of business owners said finding credit was their biggest problem. 29% said they borrow on a regular basis. The most important question for business owners is how hard is credit to come by today? A net of 9% of those regular borrowers said that loans were harder to get, not easier. Also, a net greater number of owners expect credit to be harder to come by in the future.

We asked our NYC respondents if they had borrowed recently, and if it was for business sustainment or expansion. We found that in almost every case where borrowing occurred, it was for business sustainment (but borrowing had not occurred in most cases). Some indicated that where lenders were once plentiful, sometimes they had to search a little harder and outside of their operating areas for best rates. Another of our respondents, one with a highly successful operation, indicated that offers were plentiful but always seemed to be that way.

Regarding capital spending, the NFIB confirmed what our NYC survey indicated, that most companies were operating in “maintenance mode,” or just spending enough to keep their current operations fresh. The percentage of owners planning capital outlays for the next six months was 20%.

One of our respondents noted that we should query about the usage of credit cards as an indicator of the tough economy. This respondent who wished to remain unnamed said that there was certainly an increase, whereas in the past, “people would come in with big wads of cash.” So I asked a few others qualitatively if they noted increasing credit card usage also. Regina Katopodis, Co-Owner and Manager of Artopolis, a thriving bakery and patisserie in the heart of Astoria, New York, said, "There are more, and we don't mind." The warm-hearted and lively lady continued, "We understand times are tough, and so we have always accommodated our credit card paying customers by having no minimum spend limit. Someone can buy a cup of coffee on credit, and even though it impacts our profit margins, seeing people through tough times is more important to us."

The group of small business people I interviewed was generally more positive than what the NFIB data indicates about sentiment nationally, but maybe that says something about busy New Yorkers and a certain level of optimism that exists here. The New York population center is going to be busier than other areas, because it replenishes itself. When a company goes out of business here, it tends to be replaced by a new firm with bright ideas. Likewise, vacated apartments are quickly filled by newcomers with new jobs. As a result, the big city may sink a bit in recession, but it always resurfaces before long with new vibrance. When asked about the economy and business conditions in 2013, the New York respondents were more optimistic than what was seen nationally and I think that’s why. "I feel a buzz out there. I feel the energy in the air," noted Regina of Artopolis.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.