Small Business Economic Trends - May 2012

Bill Dunkelberg



The Index of Small Business Optimism gained 2 points to 94.5 in April, a nice gain on an absolute basis. This month’s Index is the highest reading since December 2007, the peak of the last expansion. That’s the good news. The bad news is that April’s gain is the same as it was in February 2011 proving a year with no real gains. No surprise, since nothing much happened during that time that would make owners more optimistic about the future.

The net change in employment per firm seasonally adjusted was 0.1, half of the March gain, but equal to February and the third month in a row in positive territory. So, some job creation is occurring, although a lot of it will be “below the radar” of government statistics for a while. Forty-seven percent of owners hired or tried to hire in the last three months and 34 percent (72 percent of those trying to hire or hiring) reported few or no qualified applicants for positions. The percent of owners reporting hard to fill job openings rose 2 points to 17 percent, a point below January, the highest reading since June 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate and indicate that the rate would likely fall (as it did, to 8.1 percent), other things equal. Seasonally adjusted, the net percent of owners planning to create new jobs rose 5 percentage points, a nice gain which hopefully signals continued gains in actual employment per firm.

The frequency of reported capital outlays over the past six months rose 2 points to 54 percent, nothing to write home about. The record low of 44 percent was reached most recently in August 2010, so spending rates are 10 points ahead of that. But in 2007, an average of 60 percent reported making capital outlays. So, it appears that spending remains more in “maintenance” than in “expansion” mode. The percent of owners planning capital outlays in the next three to six months gained 3 points to 25 percent, the best reading since early 2008 but well below “normal.” Seven percent characterized the current period as a good time to expand facilities (seasonally adjusted), unchanged. The net percent of owners expecting better business conditions in six months was a negative 5 percent (3 point improvement), better, but still more owners expecting the economy to deteriorate than looking for improvement. A net 6 percent of all owners expect improved real sales volumes, down 2 points. Nineteen (19) percent reported “poor sales” as their top business problem, down 3 points, a good sign, but still too high. Overall, the outlook is not conducive to a lot of new spending or hiring.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months gained another 3 points to 4 percent, this after a surprising 8 point gain in March. This is the best reading since April 2007 and equal to the average 4 percent reading in 2006. Nineteen (19) percent still cite weak sales as their top business problem, historically high, but down from the record 33 percent reading in December 2010. Hardly a ringing endorsement of prospects for a strong recovery. Still, sales trends are looking good, maybe the improvement is “sneaking up” on small business owners. The net percent of owners expecting higher real sales lost 2 points, falling to a net 6 percent of all owners (seasonally adjusted). A net negative 8 percent of all owners reported growth in inventories (seasonally adjusted), a one point improvement. Plans to add to inventories remained at a net 0 percent of all firms (seasonally adjusted). So, as inventories pile up at the larger firms, small business customers remain reluctant to buy them.

Twenty-six (26) percent of the NFIB owners reported raising their average selling prices in the past 3 months (up 1 point), and 16 percent reported price reductions (down 1 point). Twenty-five (25) percent plan on raising average prices in the next few months, 2 percent plan reductions. Price cutting appears to be fading and this will put upward pressure on the inflation measures.

Reports of positive earnings trends improved a stunning 11 points to a negative 12 percent in April, the best reading since April 2007. The improvement was driven by the best sales trend reports since April 2007. Profits are the major source of capital for financing hiring and expansion for small firms, making this a very welcome development. Three percent reported reduced worker compensation and 18 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation, the highest reading in 39 months and unchanged from March. A net seasonally adjusted 9 percent plan to raise compensation in the coming months also unchanged from March. Overall, April was a great report for profit and sales trends, hopefully the beginning of a solid trend.

Financing remained low on the list of concerns for business owners. Only 3 percent cited financing as their top business problem. Ninety-two (92) 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, eight percent reported that not all of their credit needs were satisfied (the record low is 4 percent, reached in 2000), and 49 percent said they did not want a loan A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), down 4 points.

April was a good report, lots of positive changes, but unfortunately leaving us in the same place we were in February of last year. So, a year with no progress. Most encouraging were long awaited gains in positive sales and profit trends, a key ingredient to any recovery on Main Street.

First quarter GDP growth was reported at 2.2 percent, weaker than most observers expected but consistent with the NFIB survey numbers. The Index continues to hold at the higher values of what would be considered recession level readings. Optimism has been unable to break out into expansion mode for years, producing a few false starts with no follow- through. There are hints in the April data that suggest that job creation and consumer spending were better than first reported by the government, so revisions may be positive. The unemployment rate decline was anticipated by the increase in reported hard-to-fill job openings and reported job creation was weaker in April than March, but positive. Job creation was weaker than the survey anticipated, but there will likely be upward revisions to the April figures.

Looking at the larger economic picture, there isn’t much reason for owners to become optimistic, the stock market is good, but the economy is bifurcated. The big tech, manufacturing and agriculture firms are doing very well as profits are at a record level. But that has not been the case on Main Street. Washington clearly is not going to address our fiscal imbalances and uncertainty is huge, about taxes, health care, new rules to help unions, energy prices, regulations and the election outcome. The Federal Reserve has taken policy into territory for which no maps exist; it’s not clear where its policies will take us. Developments in Europe only magnify fears that there is another “adjustment” ahead that will be as disruptive as the one we just went through. Consumer and owner confidence in government policies is at historic lows. Whatever discretionary spending consumers and owners might do is still being deferred where possible. Owners are betting their own money and are looking for better odds before putting money on the table. Most likely, there will be little improvement on Main Street in optimism or hiring and spending this year.

This survey was conducted in April 2012. A sample of 10,799 small-business owners/members was drawn. One thousand eight hundred seventeen (1817) usable responses were received – a response rate of 17 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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