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Merryn's Blog

It's tough at the bottom

Small may be beautiful, but business continues to be brutally tough for small companies right now. And that's a bad sign.

Small may be beautiful, but business continues to be brutally tough for small companies right now. That's a bad sign.

Yesterday the Bloomberg's Professional Global Confidence index hit its highest point since the series began two years ago. In other words, the big boys are feeling better about life.

But that top-end bullishness hasn't filtered too far down the line. The Bloomberg chart below tells the tale of what's happening in the States.

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The blue line shows the US ISM Manufacturing index. This tracks the previous month's manufacturing level. As you can see, the index has bounced from the low-30s to around 55. In other words, in overall terms, firms that make things in America have returned to normal levels of activity.

Professional-Global-Confide

[click on the chart for a larger version]

Yet the National Federation of Independent Business (NFIB) is saying something very different. Yes, the latest NFIB Optimism index- the red line on the chart above, gauging the percentage of small firms that expect business to improve- shows a slight pick-up from the lows of early last year. But this index is still way below the '50' level which indicates a real recovery. What's more, the recovery in the index has clearly stalled.

To make the point further, look at the second chart.

credit-and-capex

[click on the chart for a larger version]

The NFIB Expected Credit Conditions index- the green line - shows the net balance of respondents who consider that loans will be easier to get over the next three months. A current -15% reading shows that most small businesses aren't too optimistic on this score.

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Little wonder, then, that the percentage of respondents- the purple line - planning to increase capital expenditure (capex), i.e. to invest in new kit, is lingering around the lowest level for years. If you're bearish about likely business, and find loans harder to come by, you don't invest for the future.

And here's the rub. It's one thing for the great and the good to proclaim the economy is improving. They're the ones who tend to get the massive government bailouts and handouts. But the small man is the real bedrock of the economy. If he's not getting any benefit from the big players, the chances are that any recovery will soon fizzle out.

Throw into the mix, as we said in Money Morning today, that the US government- along with many others - won't have the cash to keep on making many more of those handouts, and the overall economic outlook starts to look very dark indeed.

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