Business Owner Optimism Is Highest Since 2004

Small companies are optimistic and ready to invest in growth says a new survey from Wells Fargo and Gallup.

Small business optimism is at record highs.

In the third quarter, optimism surged 12 points to 118, according to the Wells Fargo Small Business Index, released this morning. That's the highest in the survey's 15-year history. The number of respondents reporting very good or good cash flow (69%) also hit a record high. Ditto the number (78%) calling their financial position very good or good. Large majorities also say they expect their financial position and cash flow to remain strong over the next year.

The survey--conducted in conjunction with Gallup--includes 604 companies, chiefly in the $2 million to $3 million annual revenue range.

The winds beneath business owners' wings are a strong economy and 2017 revisions to the tax code benefiting non-incorporated businesses through lower individual rates and a 20 percent deduction for pass-through companies. "That puts them on a surer footing and in a better position to expand," says Mark Vitner, managing director and senior economist at Wells Fargo.

Healthy cash flow-which is so critical for small business owners--is also feeding the bullishness. "Folks are paying and paying in a timely manner," says Vitner. But respondents were somewhat less cheerful about revenues, with just under half reporting significant increases in the last year. A higher number--61%--anticipate revenue growth in the next 12 months.

Optimism buoyed by strong performance translates into hiring and investment. Twenty-six percent of business owners reported adding headcount over the past year (just 8% had reduced it) and a record 35% planned to hire in the next 12 months. Thirty-two percent increased capital spending over the last year, and 37% say they plan to do so. The means to expand are there: 49% called access to credit easy or very easy, the best numbers since before the recession. Also, "a lot of small business owners tap home-equity to fund their businesses," says Vitner, and home prices have been rising.

"The fact that a large number of small businesses plan to increase capital spending bodes very well for the economy over the next couple of years," says Vitner.

Small business owners expressed the usual concerns about a tight labor market, with finding and keeping good people cited as the top challenge.

One surprising finding from the survey: tepid plans by small business to increase their social media presences. "I think there is a large cohort of small businesses that are not really affected by social media or don't see a strong benefit to it," says Vitner. "They don't face a lot of competition from the Internet. Or at least they don't think they do."

Vitner sees no imminent end to economic expansion, comparing this era to the mid-1990s, when several years of strong growth lay in store. "Everybody keeps asking, do you think we are in the seventh or eighth inning?" he says. "We may be more toward the middle of this game than toward the end of it."

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