The small-business optimism index fell in October to its lowest level in more than 10 years, presaging a shrinking of the economy in the final quarter of the year.
Economist William C. Dunkelberg, who analyzed replies from more than 2,000 small- and medium-size businesses, said the gross national product would decline by 1.5 percent, "the first official quarter with negative growth."Dunkelberg said the responses suggested the decline would be accompanied by higher unemployment and worsening inflation, and he blamed the latter partly on what he said was Congress' failure to solve the deficit problem.
Adding to inflationary pressures, he said, was the prospect that Congress is "prepared to heap on a whole new set of cost-raising regulations," including various mandated costs and paperwork that will consume time and effort.
The index is based on responses from members of the National Federation of Independent Business, which claims more than 500,000 members, ranging from proprietorships to companies with sales in the hundreds of millions of dollars.
The federation says the business community it represents employs about half the private non-farm work force and produces about 50 percent of the gross national product, and that its optimism index foretells economic direction.
Its estimate of the third-quarter gross national product, for example, was for a gain of 1.7 percent on an annual basis, just one-tenth of 1 percent from the Commerce Department's preliminary estimate of a 1.8 percent gain.
Dunkelberg, dean of Temple University's school of business and management, was especially critical of what he said was legislation-induced inflation resulting from imposition of regulations and mandates on an already stressed private sector.
Among regulations he said would add to business costs were a rise in the minimum wage and "mandated health costs, mandated leaves, mandated access for the handicapped, mandated pollution controls and lots of related paperwork that will eat up valuable entrepreneurial time."
In effect, he said, mandates are a form of taxation atop official taxation, which the responding companies said was the number one problem facing small businesses today.
The Federal Reserve, he said, cannot reduce this kind of inflation through monetary policy, adding that "only Congress can do it with some responsible legislation and some common sense."
While many people expect the Fed to ease up on the money supply and allow interest rates to fall, Dunkelberg discounted the possibility. Inflation fears, he said, will simply prevent any major easing.
A large factor in the decline of the confidence index was what Dunkelberg said was the "incredible" finding that 43 percent of the companies expect business conditions to worsen, almost double the previous quarter's level.
Expected business conditions is one of ten items making up the index. Among others are expected sales volumes, expected credit conditions, current job openings, plans to hire and capital outlay plans.
The index was begun in 1974 and uses 1978 conditions as its base of 100. The latest reading of 92.3 was the lowest since the second quarter of 1980, when the all-time low of 81.1 was reached.
Aside from the all-time low, the latest reading was the lowest for any quarter since the first year of the index's existence, when it reached 87.8 in early 1975.
Summing up the results, Dunkelberg said, "It's clear the economy is going down, at least for a short count." The expansion wasn't marked by extremes, he said, "and it is likely the slowdown that follows will be equally boring."