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Small Business Economic Confidence Dips For First Time In Five Months

December 26, 2006
Riverwoods, Illinois, December 26, 2006 – Small business owners' confidence in the U.S. economy dipped somewhat in December, although optimism about the year ahead still remains high, according to the monthly Discover® Small Business WatchSM. This month's Watch fell to an adjusted* 109.7 from its four-month high of 114.6 in November, pointing to a leveling of an autumn-long surge in confidence reported by a survey of 1,000 small businesses with five or fewer employees.

“Since August, the Watch has tracked the steadily improving economic mood of American small business owners,” said Sastry Rachakonda, director of Discover Business Card. “This month's decline is tied primarily to deterioration in cash flow, which may indicate a trend or may be a function of the season. We have seen no change in business credit card usage."

“The good news is that owners express optimism about their prospects for 2007 as nearly two-thirds (64 percent) say economic conditions for their businesses are the same or getting better, and four owners in five (82 percent) claim they will give their employees some kind of raise next year.”

December Key Findings:

•The number of owners who experienced cash flow issues in December causing them to hold off on paying some bills rose to 42 percent from 39 percent last month.

•The number of owners who planned to increase spending on business development activities dropped slightly to 37 percent this month, down from 39 percent in November, but higher than the 30 to 33 percent range seen from August through October 2006.

Spotlight Poll: The Effect of a National Minimum Wage Increase

Employee Costs Not Likely to Jump with Minimum Wage

•Seventy percent of small business owners say an increase in the minimum wage to $7.25 per hour would have no impact on their employee costs. “This most likely reflects that many small business owners pay more than the minimum wage to their employees,” Rachakonda said.

“The Watch found an overwhelming majority of small businesses would see no major impact on employee costs due to a minimum wage increase. However, a significant number of small business owners (29 percent) did feel a minimum wage increase would likely affect the price of goods and services they use.”

Most Consumers Are Willing to Pay the Price for a Minimum Wage Increase
•The Discover Small Business Watch survey found that 57 percent of consumers are willing to pay a higher price at small businesses that meet minimum wage regulations. Fifty-two percent of consumers would expect prices to go up as a result of a minimum wage increase.
•Sixty-six percent of consumers think a minimum wage increase will either help or have no impact on small businesses while 33 percent of consumers think an increase would hurt small businesses.

Small Business Owners and Employees Differ on Raise Expectations
•Thirty-seven percent of small business employees expect a wage increase in 2007, and 51 percent of them expect a bigger raise than the previous year.
•Only 9 percent of small business owners expect to give higher raises in 2007, while 61 percent of owners plan to give the same raises as in the previous year.

“This highlights the challenges that small business owners face: They expect rising cost pressures yet they also have to consider employee expectations around the size of their wage increases,” Rachakonda said.

* Note: The method for calculating the Discover Small Business Watch has been revised slightly, effective with this month's release. The adjustment does not change the outcomes of the survey, nor does it change the directional trends spotted by the Watch, according to Rasmussen Reports, the conductor of the Discover Small Business Watch. The revisions, based upon a review of data collected over the past five months, are intended to adjust weightings to more closely correlate with movements in the small business sector of the U.S. economy. All previous index measures have been recalculated in line with the adjusted formula. The index is not seasonally adjusted.

About the Small Business Watch:

The Discover Small Business Watch is a monthly index measuring the relative economic confidence of U.S. small business owners who employ less than five employees, a segment that consists of 22 million businesses producing more than a trillion dollars in annual receipts. The Watch is based on a national random survey of 1,000 small business owners conducted by Rasmussen Reports, LLC (www.rasmussenreports.com), an independent survey research firm. The numeric index is calculated by assigning values to responses to a set of six consistent questions. The base value of the Watch was established at 100.0 based on surveys conducted in August of 2006. In addition to generating the index, the Small Business Watch surveys small business viewpoints on key business drivers, and also surveys 4,000 consumers to gauge purchasing behavior and attitudes towards small businesses. For more information, visit www.discoverbiz.com.

About Discover Financial Services LLC:

Discover Financial Services LLC, a business unit of Morgan Stanley (NYSE: MS), operates the Discover Card with more than 50 million Cardmembers, and the Discover Network with more than 4 million merchant and cash access locations. Discover Financial Services also operates the PULSE ATM/debit network, which serves over 4,200 financial institutions and includes almost 250,000 ATMs and approximately 3.4 million POS terminals. For more information, visit www.discovercard.com, www.discovernetwork.com or www.pulse-eft.com.

The views and opinions expressed by small business owners and consumers who participate in the Small Business Watch survey are their own and do not necessarily reflect those of Discover Financial Services or its affiliates.

Media Contacts:

Jon Drummond
Discover Financial Services LLC
224-405-1888
jondrummond@discoverfinancial.com

Neena Kadian
Robinson Lerer & Montgomery
646-805-2058
nkadian@rlmnet.com