Wells Fargo Small Business Survey: Q3 2014

Small Business Confidence Continues to Trend Higher

After jumping 21 points in the first quarter of this year, the Wells Fargo Small Business Index edged up 2 points during both the second and third quarters. Views on both the present situation and future expectations have improved modestly over the past two quarters. After staging a huge bounce back in confidence at the start of the year, businesses have been more guarded as they have had to contend with a host of unusual events ranging from unusually harsh weather earlier this year to the recent string of geopolitical events around the world. Throughout this tumult, business owners’ views about current economic conditions have gradually improved, largely on the strength of better operating results. Views on future economic conditions have also risen, but are being held back by concerns about public policy and geopolitical events.

One of the most encouraging aspects of the latest survey results is the improving trend in company revenues. After remaining fairly stable at around 36 percent for six quarters, the proportion of business owners reporting that company revenues increased over the past year rose 7 points in the latest quarter to 43, which is the highest level since Q1 of 2008. The proportion of firms reporting that revenue fell over the past year fell 2 points to 30 percent, while the proportion reporting revenues remained the same over the past year fell 5 points to 27 percent. 

The rising proportion of businesses reporting that revenues have risen over the past year is consistent with recent reports that show overall economic activity has strengthened over the past year. After averaging a 2.1 percent pace during the first four years of the recovery, real GDP growth has ramped up to a 2.4 percent pace this past year. Stronger economic growth has helped bolster operating margins and cash flow. The proportion of firms reporting that their cash flow was very good or somewhat good over the past year rose 5 points to 55 percent in the third quarter and has remained at 50 percent or better all year. 

Capital Spending and Employment Trends Look More Positive

With revenues increasing and both cash flow and operating margins improving, more businesses are moving forward with capital spending and hiring plans. The proportion of firms reporting that they increased capital spending by a little or a lot over the past year rose 3 points to 29 percent. Unfortunately, the proportion of firms reporting that they decreased capital spending over the past year also rose. On net, the number of firms increasing capital spending slightly exceeded the number that cut back, leaving the capital spending allotment gap in positive territory for the second quarter in row. 

A similar dynamic is playing out in employment. The number of small businesses reporting that they increased their payrolls over the past year rose 4 points to 18 percent, while those reporting they decreased employment rose 3 points to 20 percent. While the proportion reducing employment slightly exceeded the number increasing it, those firms that added to their payrolls appear to have done so by a greater magnitude than those that reduced employment. The growing proportion of firms stating that they are adding staff matches up well with the recent improvement in nonfarm payrolls and the drop in the unemployment rate over the past year.

Our survey also asked special questions about the use of technology in their businesses, which showed that small business owners are increasingly making use of social media, cloud computing and mobile technologies to operate and market their businesses. The proportion of small business owners reporting that their business has a website has increased to 59 percent from 54 percent in 2011. Of those that had a website, 51 percent noted that they also have a version of their website optimized for mobile devices. Most firms stated that they utilized their website to advertise their business, solicit customer feedback and communicate with customers, suppliers and employees. Nearly 4 in 10 firms stated that they utilized a tablet in their business, while 73 percent said they utilized a smart phone. An identical percentage also noted that they used a traditional landline phone in their business. 

While the adaption of smartphones and tablets has increased rapidly, 80 percent of business owners report that they use a desktop computer in their business and 70 percent said they used a laptop. About half of small business owners stated that they use social networking sites for their business and just under one-third said they used cloud-based computing software. Of those utilizing social media, about three-quarters said they used social media sites to better connect with their customers, to market or promote their business and to build an online reputation. 

Small business owners are increasingly looking at new information technologies and social media to help them with two of their most pressing needs, attracting customers and reducing the costs of running their business. Fifteen percent of small business owners answered that their most important challenge was government regulation, which was the single most important challenge reported in the survey.