Small Business Economic Trends - March 2012

Bill Dunkelberg


The Small-Business Optimism Index gained 0.4 points in February to 94.3 marking the 6th consecutive month of gains. While still historically low, the latest increase is a sign that the recovery is likely to continue. The Index is lower than that of February 2011 but the 2nd highest reading since December 2007, the beginning of the recession. The report suggests that in February, owners became slightly more pessimistic about the outlook for business conditions but more optimistic about future sales growth, making the reading mixed bag, but mostly headed in the right direction.

The net change in employment per firm seasonally adjusted was 0.11, much better than January’s “0” reading. The increase certainly shows some real job creation. The percent of owners reporting hard to fill job openings fell 1 point to 17 percent, the second best reading since September 2008. The net percent of owners planning to create new jobs fell 1 point to 4 percent (seasonally adjusted), the third monthly decline. In a decent expansion, job creation plans would be in double digits. From the start of the expansion in July 2009, job creation plans have lagged all other recovery periods, including the “jobless recovery” in 2001 where employment losses were relatively small to begin with.

The frequency of reported capital outlays over the past 6 months rose 2 points to, 57 percent, building on the solid gain posted in December. and January. The record low of 44 percent was reached most recently in August 2010. The percent of owners planning capital outlays in the next 3 to 6 months fell a point to 23 percent, still one of the highest readings in years. Eight percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point but one of the best readings since December 2007.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 1 point, falling to a net negative 7 percent, still more firms with sales trending down than up. The net percent of owners expecting higher real sales gained 2 points to a net 12 percent of all owners (seasonally adjusted) but still 2 points below a year ago. For all firms, a net 2 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. This is good news for economic growth, as more firms will be ordering new inventory to satisfy customers who are gradually increasing in numbers. A net 0 percent of all owners reported growth in inventories (seasonally adjusted), 7 points better than January. This is the best reading in years, following 56 months during which more firms reported cutting inventories than adding to stocks.

Seasonally adjusted, a net 19 percent plan price hikes, up 2 points. Price cutting appears to be fading and this will put upward pressure on the inflation measures. Seasonally adjusted, the net percent raising selling prices was 1 percent, up 2 points from January. The Federal Reserve is counting on low inflation to bolster its position that current policy is appropriate for the next year or two. Inflation as measured by the PCE deflator (the world will have to replace the CPI with the PCE, the new base for the target rate) is already above the official target. There is no target for the unemployment rate (gratefully!), but at 8.3 percent, most all would agree it is well above any target that might be characterized as “full employment.” This will be the justification for maintaining current policy.

Reports of positive earnings trends gained 5 points in February, rising to a net negative 19 percent. This is the best reading since October 2007. Profits are an important source of capital to grow small firms, so this improvement in profit trends is a welcome development. Three percent reported reduced worker compensation and 19 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation, the highest reading in 39 months. A seasonally adjusted net 12 percent plan to raise compensation in the coming months, double January’s reading and a sign that compensation is starting to improve. This is certainly good news for employees.

Financing remained low on the list of concerns for business owners. Only 4 percent cited financing as their top business problem, compared to 21 percent each citing taxes and unreasonable regulation and red tape and 22 percent citing weak sales. Ninety-three percent reported that all their credit needs were met or that they were not interested in borrowing. Thirty-one (31) percent reported all credit needs met, seven percent reported that not all of their credit needs were satisfied (the record low is 4 percent, reached in 2000), and 50 percent said they did not want a loan, (62 percent including those who did not answer the question, presumably uninterested in borrowing as well). Thirty-two (32) percent of all owners reported borrowing on a regular basis, unchanged from January. A net 8 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), also unchanged. The average rate paid on short maturity loans was 5.8 percent, stuck at much the same level for years. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10 percent (more owners expect that it will be “harder” to arrange financing than easier), 1a point worse than January.

The Index posted its 6th monthly gain, but it is still 0.2 points below its level in February 2011. No progress here, even with a six month positive trend. The good news is that things are getting better, although improving at a glacial pace. The jobs numbers are looking better, but with such unusual weather, one is never sure just what the seasonal adjustments are doing to the measures. The NFIB statistics for its 350,000 members do indicate that jobs are finally being created, but again, at a slow pace. Adding millions to our population over the past few years certainly helps lift the need for workers, as well as for provide them.

NFIB inflation numbers are benign retrospectively, with a net 1 percent of owners raising prices. But, 1 in 5 plan to raise prices over the coming months and if those stick, the numbers will get worse for those hoping for low inflation. The price of gasoline is a wild card going forward now that the Federal Reserve has set its inflation target based on the headline PCE (personal consumption expenditures) inflation rate and not the core which excludes food and energy. Of course the Federal Reserve can argue that any surge in inflation driven by gas prices will be temporary, the argument used to justify using core inflation measures, and thus not relevant to policy determination.

It appears that the adjustment of inventories to lower consumer spending is about done. As many firms reported increasing stocks as reported declines, the best reading since 2007. And those reporting stocks “too low” exceed those reporting “too high” by 2 percentage points, one of the best readings over the history of the survey. Stocks are lean and more firms plan to add to stocks than plan to reduce them. Reports of capital spending continue to improve, although the percent of owners characterizing the current period as a good time to expand fell and remains low. Over the 4 years of recession and weak recovery, stuff wears out, roofs leak, etc. and this prompts more capital spending. But there is no exuberance there as plans to make outlays in the future fell a bit.

Bottom line, the economy is holding on to tenuous gains, moving ahead in fits and starts which, hopefully, average out to a positive growth number. First quarter growth will not likely match that of the fourth quarter, 2011, but will remain positive. In the meantime, we will crawl toward the November election to get a clearer picture of our future.

This survey was conducted in February 2012. A sample of 3,938 small-business owners/members was drawn. Eight hundred nineteen (819) usable responses were received – a response rate of 21 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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