Big business is still booming; small business is still cautious.
Step back just a moment from the hand-wringing over the outlook for consumer spending – today’s retail sales figures suggest consumers are coping quite well, thank you, with higher gas prices and payroll taxes – and consider where corporate America is: Operating earnings per share for the S&P 500 companies totaled $23.14 for the fourth quarter of 2012, according to Howard Silverblatt of S&P Dow Jones Indices, who notes that his figures are actually lower than those from other trackers primarily because of accounting methodology for pension expenses.
Those earnings may not be growing at the same rapid clip they had been, but for the first quarter of 2013 they are now projected to edge out the all-time quarterly record set in the second quarter of 2012, according to Silverblatt. “Whether we make the record or not will be nice for the headlines, but the bottom line is that earnings have significantly improved and they’re able to hold their own in a difficult environment,” he says. “There’s a disconnect, and there has been for almost the last two years, between the S&P 500 big-cap issues and almost the rest of the world. There’s not a lot of places where you can hear people complaining because they didn’t make a new record last quarter. Most are just happy that they’re in business and they have a job.”
The disconnect extends to small business as well, based on the results of a monthly survey by the National Federation of Independent Business released yesterday. Small business sentiment improved in February, with the NFIB saying its monthly Index of Small Business Optimism edged 1.9 points higher to 90.8. That’s third straight month of improvement, but the index remains “very low” by historical standards, the NFIB said – It’s on par with the average for 2008, when the economy was in recession, and below the lows of the 1991-2 and 2001-2 recessions.
“While the Fortune 500 are enjoying record high earnings, Main Street earnings remain depressed,” NFIB chief economist Bill Dunkelberg said in a statement accompanying the monthly release. “Far more firms report sales down quarter over quarter than up.”
Small business owners remain worried about taxes, government red tape and weak sales, with 19 percent of the survey respondents reporting higher sales and 33 percent reporting lower sales over the past three months. Just over three quarters of NFIB owners in the survey said they see business conditions being the same or worse in six months. “The small business half of the economy is clearly languishing based on NFIB surveys of its 350,000 member firms,” Dunkelberg said, adding that “until owners’ forecast for the economy improves substantially, there will not be much of a boost to hiring and spending from the small business half of the economy.”
What’s behind the split in sentiment between large and small companies? Dunkelberg, a frequent critic of the Obama administration, points to fiscal policy and the president in what The Wall Street Journal’s Michael S. Derby called “an unusually partisan analysis” for such an economic report. “The president has crisscrossed the country telling us how many people will be hurt if he has to deprive them of his largess if spending is cut,” Dunkelberg wrote. “And he has chosen cuts that will maximize the pain felt by the citizens, refusing the opportunity to actually lead and manage the cuts more sensibly. But he has nothing to say about the pain he inflicts on the producers of jobs that could help those who are unemployed and want to work.”
Dunkelberg isn’t alone in suggesting Washington policies are the problem. “The damage in the NFIB survey is being done, in our view, by fear that the payroll tax increase and the sequester will dampen economic growth, as well as ongoing uncertainty over future fiscal policy,” economist Ian Shepherdson of Pantheon Macroeconomic Advisors wrote in a note to clients before the NFIB numbers were released to the public. “Small firms, with their dependence on domestic customers, are much more concerned about Washington’s inability to formulate coherent fiscal policy than their larger, globally-focused competitors.”
Small businesses represent about half of GDP, Shepherdson notes, so sentiment in that portion of the economy could be a real obstacle to broader economic improvement. “Economic growth is trapped between the strength of large firms and the weakness of small ones,” Shepherdson wrote. “The bad news is that the small firm sector seems set to take another turn for the worse.”