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Federal Woes Faze Small Business Owners


Two weeks ago, Andy Vabulas canceled a $100,000 plan to upgrade his company’s aging communications system, saying he is holding off on spending until U.S. federal budget issues are resolved.

“We’ve decided to keep our money until we have a better idea of what’s going on” in Washington, said Mr. Vabulas, the 58-year-old owner of I.B.I.S. Inc., a supply chain software firm in Peachtree Corners, Ga.
Beltway battles are taking a toll on small-business owners, like Mr. Vabulas, whose confidence in the economy fell to a nine-month low in October, according to a survey by Vistage International Inc. and The Wall Street Journal.

The slump follows a budget impasse that forced many federal agencies to shut their doors for two weeks at the start of the fiscal year. It was the sharpest decline in confidence since January, when lawmakers clashed over federal spending during the so-called fiscal cliff crisis.

Of 692 business owners surveyed online between Oct. 7 and Oct. 16, 36% said they felt the economy was improving, down from 47% in September. Just 21% said they expect conditions to pick up in the year ahead, down from 30%, according to the survey, which was conducted before Congress reached an agreement on Oct. 17 to reopen federal offices. The survey was limited to firms with less than $20 million in annual revenue.

Overall, the WSJ-Vistage Small Business Confidence Index dropped to 97 from a record-high 105.3 in September, though it is up from 95.3 a year ago. The monthly index is based on survey responses to issues ranging from economic conditions to hiring and spending plans. The index had remained above 100, its baseline score, since February.

In October, fewer business owners said they expect revenue or profits to grow this year, and as a result, fewer were planning to invest in facilities and equipment, while hiring plans remained flat, the survey found.

Richard Curtin, a University of Michigan researcher who analyzed the October results, said the temporary budget and debt ceiling extension, approved by Congress last week, would likely keep the level of uncertainty high through the rest of the year.

He said it was “troublesome” that Congress had become such a major source of economic uncertainty for small businesses.

The biggest drop in confidence in October was reported by small federal contractors, including many whose income was cutoff during the two-week government shutdown.

Among these firms, the confidence index fell to 89.4, compared with 99.1 among firms that didn’t do business with the federal government. About one-in-five businesses in the October survey said they had done work for the federal government within the past two years.

The confidence index hit an all-time low of 83.9 during the November 2012 presidential elections, which Mr. Curtin at the time credited to an especially high level of uncertainty among business owners.

A separate survey of more than 600 small and midsize businesses, released Wednesday by the Principal Financial Group, also found that small-business owners are keeping spending tight. While two-thirds of owners said they had surplus capital, 75% said they aren’t spending it, the survey found. Most owners blamed the spending slump on health-care costs and the unsteady economy.

Mr. Vabulas, whose firm has 104 employees and $24 million in annual revenue, says weak spending at other companies has had a direct impact on his own:

“If others cut back, we have to cut back, too.”
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