Small Business Economic Trends - February 2012

Bill Dunkelberg



The Index of Small Business Optimism gained 0.1 points, to 93.9, so basically unchanged from December. Index readings from January and February 2011 were higher, so we are still below where we were a year ago even though the Index has risen five months in a row. Except for January and February of 2011, the current Index is the highest reading since December 2007 when the economy peaked. But, in spite of the progress made in the past few months, the fact is that it still remains at recession level readings.


NFIB reports of job growth improved from December, but only to a net increase in workers per firm of “0”, up 0.15. Not much job creation in that number. Seasonally adjusted, 11 percent of the owners added an average of 3.0 workers per firm over the past few months, while 11 percent reduced employment an average of 2.9 workers per firm. Forty-one percent of owners hired or tried to hire in the past 3 months, but 31 percent reported few or no qualified applicants for the position(s) – three of four applicants were not qualified. Eighteen (18) percent (seasonally adjusted) reported hard to fill job openings, up 3 points and the highest reading since June 2008, just before economic growth crashed. Over the next three months, 13 percent plan to increase employment (up 4 points), and 7 percent plan to reduce their workforce (down 1 point), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs, a 1 point decline from December. There is no surge in hiring indicated by these numbers, leaving employment gains far short of the level needed to significantly reduce unemployment and under-employment.


The frequency of reported capital outlays over the past 6 months lost one point, declining to 55 percent, retaining the solid gain posted in December. Overall, the spending picture has improved, but still far short of “normal”. The percent of owners planning capital outlays in the next 3 to 6 months held at 24 percent, the highest reading in years. These are better readings, but still 10 points lower than typically seen in an expanding economy. Money is available, but most owners are not interested in a loan to finance the purchase of equipment they don’t need. Nine percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point and one of the best readings since the start of the financial crisis. The net percent of owners expecting better business conditions in 6 months was a negative 3 percent, 5 points better than December but still 13 percentage points below last year’s reading. Hopefully, this improvement in the economic outlook will translate into more spending and hiring.


The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months gained 1 point, rising to a net negative 6 percent, still more firms with sales trending down than up. Even with the improvements in retail sales in recent months, 22 percent of the owners still reported “weak sales” as their top business problem. The net percent of owners expecting higher real sales gained 1 point to a net 10 percent of all owners (seasonally adjusted) after posting an 8 point improvement in November and 5 points in December. Solid moves, but leaving the indicators still in recession territory. A net negative 7 percent of all owners reported growth in inventories (seasonally adjusted), 3 points better than December. For all firms, a net 1 percent (up 1 point) reported stocks too low, a very “satisfied” reading based on survey history. Overall, it appears that small business owners have reduced inventories to acceptable levels given the outlook for sales growth. Without improved sales, there is little motivation to order new inventory stocks. Plans to add to inventories lost 5 points to a net negative 3 percent of all firms (seasonally adjusted), falling from the December reading which was the best reading in 18 months.


Eighteen (18) percent of the NFIB owners reported raising their average selling prices in the past 3 months (up 1 point), and 17 percent reported price reductions (down 1 point). Seasonally adjusted, the net percent raising selling prices was -1 percent, down a point from December. Twenty-three (23) percent plan on raising average prices in the next few months, 3 percent plan reductions. Seasonally adjusted, a net 17 percent plan price hikes up 3 points. With some evidence that spending has picked up, some of these price hikes might stick.


Reports of positive earnings trends were 2 points worse in January at a net negative 24 percent of all owners taking back part of the 6 point improvement registered in December. Unable to raise prices and with weak sales growth, small businesses are unable to restore profitability. Profits are the source of capital to grow small firms (they can’t sell shares to shareholders to provide new capital), so weak profits are hindering improved capital spending in this sector of the economy. Four percent reported reduced worker compensation and 14 percent reported raising compensation, yielding a seasonally adjusted net 12 percent reporting higher worker compensation, the highest reading since November 2008.


Four percent reported financing as their #1 business problem. Nine percent reported that not all of their credit needs were satisfied (the record low is 4 percent, reached in 2000). Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point and only 2 points above the record low. A net 11 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 1 point.


From the perspective of NFIB owners, 2011 was a flat year at best. The Index of Small Business Optimism stood at 94.1 in January 2011 and 93.9 in January 2012, after dipping as low as 88.1 in August of 2011. The best that can be said is that the year ended on an upbeat note, with 5 months of improvement if January’s 0.1 gain is regarded as an improvement. For perspective, the Index stood at 94.6 in December 2007 as the economy slipped into recession.

The prospects for resolving the major uncertainties facing small business owners in 2012 are low. Government spending surges ahead, undisciplined without a federal budget for over 1,000 days which is no way to run the largest “business” in the world, USA, Inc. Tax issues remain unresolved and spending issues unaddressed. In the meantime, the President moves ahead, using executive orders to implement policies that many believe are the responsibility of Congress.

The Federal Reserve Bank officially announced an inflation target, setting a goal for one of its twin policy mandates. The inflation rate target will be 2 percent as measured by the Personal Consumption Deflator. It was a surprise to many that it did not choose the “core” PCE inflation rate which excludes volatile food and energy prices. Headline inflation rates are more volatile, leaving a question as to how much “volatility” in policy might be required to deal with energy price swings. Since no other details were made available, many important questions go unanswered. It is important to know over what period of time the Federal Reserve must hit the 2 percent target, what the “penalty” is for failing to do so, and how policy directed at “price stability” will be impacted by an unspecified unemployment rate objective. We are a long way from what most observers would accept as a reasonable level of the unemployment rate, so how far above the 2 percent inflation target will the Federal Reserve go in an attempt to lower unemployment. If they specify a time period over which the 2 percent inflation target is to be met, but as we near the end of that period, inflation is well above the target, must the Federal Reserve “hammer” the economy to meet it? Currently, the PCE inflation rate is above the 2 percent target, so tightening would be the order of the day – except that the unemployment rate is 8.3 percent, well above the secret unemployment rate target, which begs for more monetary expansion, a QE3. Go figure, that’s what everyone is doing.

So, overall, the January NFIB survey indicates that the economy will continue to crawl along at a sub-par pace. There appears to be no pressure on prices at the core level, energy is the wild card. Wage growth is picking up, but slowly. The net increase in jobs of “0” is not promising for job creation nor was the decline in the net percent of owners planning job creation. The increase in the percent of owners with hard to fill job openings does indicate that job markets are tightening somewhere, and correctly anticipated a decline in the unemployment rate. There was no exuberance in capital spending, but the improved levels reached at the end of 2011 held up. So, “muddle through” seems to best characterize the first half of the year. Too much uncertainty with little prospect of much resolution.

This survey was conducted in January 2012. A sample of 10,799 small-business owners/members was drawn. Two thousand one hundred fifty-five (2155) usable responses were received – a response rate of 20 percent.

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.

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