Small Business Economic Trends - January 2012

Bill Dunkelberg



The Index of Small Business Optimism gained 1.8 points to 93.8. December’s increase is the fourth monthly gain, totaling 5.7 points overall. About half of last month’s gain was due to reduced concerns about business conditions 6 months ahead and improved expectations for real sales gains. One-third of the gain was due to a much welcomed 6 point improvement in profit trends.


Fifteen (15) percent (seasonally adjusted) reported hard to fill job openings, down 1 point but the second highest reading in 39 months. Over the next three months, 9 percent plan to increase employment (down 2 points), and 8 percent plan to reduce their workforce (down 3 points), yielding a seasonally adjusted net 6 percent of owners planning to create new jobs. This is a 1 point decline from November but still one of the strongest readings for 2011 and the second highest reading since September 2008. Forty- five (45) percent of owners hired or tried to hire in the past 3 months, but 34 percent of them reported few or no qualified applicants for the position(s). The NFIB unemployment forecast models (based on reports of poor sales or on job openings and plans to increase employment shown below) indicates that the unemployment rate will drift into the mid to low 8 percent range in 2012.


The frequency of reported capital outlays over the past 6 months rose 3 points to 56 percent, the third monthly increase in succession after vacillating between 44 and 52 percent since December 2008. The record low of 44 percent was reached most recently in August 2010. 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 40 months, also reached in March and November of this year. Money is available, but most owners are not interested in a loan to finance the purchase of equipment they don’t need.


The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months gained 4 points, rising to a net negative 7 percent, still more firms report sales trending down than up. The net percent of owners expecting higher real sales gained 5 points to a net 9 percent of all owners (seasonally adjusted) after posting an 8 point improvement in November, but still stood 4 points below January’s reading. A net negative 10 percent of all owners reported growth in inventories (seasonally adjusted), unchanged. For all firms, a net 0 percent (up 1 point) reported stocks too low, still 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.


Seasonally adjusted, the net percent raising selling prices was 0 percent, unchanged from November but 10 to 15 points below April, May and June readings. This indicates little pressure on prices overall. Twenty-one (21) percent plan on raising average prices in the next few months, 4 percent plan reductions. Seasonally adjusted, a net 14 percent plan price hikes, down 1 point. With some evidence that spending has picked up, some of these price hikes might stick.


Reports of positive earnings trends were 6 points better in December at a net negative 22 percent of all owners. The improvement in retail sales gave some owners a needed boost. Not seasonally adjusted, 16 percent reported profits higher (up 2 points), and 37 percent reported profits falling (down 3 points). Still, profits showed a dismal performance historically. Compensation costs are rising, but not at a rapid rate. Six percent reported reduced worker compensation and 12 percent reported raising compensation, yielding a seasonally adjusted net 10 percent reporting higher worker compensation, unchanged from November and matching the highest reading since November 2008. However, the numbers are historically low. A seasonally adjusted net 5 percent plan to raise compensation in the coming months, 4 points lower than November, no rush to raise compensation to attract workers.


Four percent reported financing as their #1 business problem, not an issue compared to weakness in sales or taxes or the cost of regulation. Ninety- three (93) percent reported that all their credit needs were met or that they were not interested in borrowing. Seven percent reported that not all of their credit needs were satisfied. The record low is 4 percent, reached in 2000. Fifty (50) percent said they did not want a loan but increases to 64 percent when including those who did not answer the question, presumably uninterested in borrowing as well. Twenty-three (23) percent of the owners reported that weak sales continued to be their top business problem, so investments in new equipment or new workers are not likely to “pay off” by generating enough additional earnings to repay the loan required to finance the investment. Thirty-one (31) percent of all owners reported borrowing on a regular basis, down 3 points. A net 8 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), down 2 points. The average rate paid on short maturity loans fell to 5.9 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 9 percent (more owners expect that it will be “harder” to arrange financing than easier), a 1 point improvement over November. The December reading is the least negative since November 2008, so confidence in the financial markets ability to provide desired financial services may be recovering.


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 and ended the year at 93.9, after dipping as low as 88.1 in August. The best that can be said is that the year ended on an upbeat, with 4 months of improvements. Eight of the ten Index components did end the year higher, the spoilers were Expected Business Conditions in 6 Months, which ended the year 18 points below January readings, and Expected Real Sales Volumes which ended 4 points lower. So, an index that excluded these expectations variables would have ended the year a bit higher.

The “real” components of the Index ended 2011 relatively well positioned compared to January, but at historically low levels nonetheless.

  January December
Job Creation Plans 3 6
Job Opensings (hard to fill) 13 15
Capital Spending Plans 22 24
Inventory Satisfaction 0 0
Plan to Increase Inventory -1 2

*Values expressed as net percent of firms

Reports of actually capital outlays increased from 51 percent to 56 percent of all owners after languishing for several years at or below 50 percent.

There are many critics of the proposition that “uncertainty” is a major cause of the slow recovery, many because it reflects badly on the Administration’s policies (which are characterized as “bad” by a 50 year record high percentage of consumers). However, such a “reality” is very logical, and is now confirmed by substantial survey evidence (if common sense wasn’t enough!). Plans for job creation, inventory investment and capital spending are all highly correlated with expected real sales (around 70 percent). Pessimism about future sales translates into less real spending.

The economy appears to be slowly recovering, resolving imbalances in debt, housing and the like. But, it is unlikely that growth will be much better in 2012 than in 2011 even with a solid 3 percent plus fourth quarter. There is still a lot of work to be done.

This survey was conducted in December 2011. A sample of 3,938 small-business owners/members was drawn. Seven hundred thirty-five (735) usable responses were received – a response rate of 19 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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