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NFIB SBET: Small Business Optimism Ticks Up Slightly

Date: August 12, 2014

August 12, 2014       Kelly Hoffman 202-314-2054 (media)
Holly Wade 202-314-2022 (research)

NFIB SBET: Small Business Optimism Ticks Up Slightly

WASHINGTON, August 12, 2014- July’s Optimism Index technically rose 0.7 points to a reading of 95.7. There was little change in the 10 Index components other than outlook for expansion and business conditions which accounted for the small gain in the Index. Even though these improved, they still remain historically low.

“On the positive side expectations for business conditions and outlook for expansion accounted for virtually all of the net gain in July’s Index,” said NFIB chief economist Bill Dunkelberg.

“However, capital spending reports continue to remain mediocre, spending plans are weak, and inventories are too large, with more owners reporting sales trends deteriorating than improving. As long as these stats continue to hold, the small business half of the economy will continue to not be able to pull its weight.”

A review of the July indicators is as follows:

•    Labor Markets.  NFIB owners increased employment by an average of 0.01 workers per firm in July (seasonally adjusted), the tenth positive month in a row and the best string of gains since 2006.  Seasonally adjusted, 13 percent of the owners (up 1 point) reported adding an average of 2.9 workers per firm over the past few months.  Offsetting that, 12 percent reduced employment (down 1 point) an average of 2.7 workers, producing the seasonally adjusted net gain of 0.01 workers per firm overall.

The remaining 75 percent of owners made no net change in employment. Fifty-three percent of the owners hired or tried to hire in the last three months and 42 percent reported few or no qualified applicants for open positions. 

Twenty-four percent of all owners reported job openings they could not fill in the current period, down 2 points, but a solid reading.  Fifteen percent reported using temporary workers, up 1 point.

•   Job Creation. Job creation plans continued to strengthen and rose 1 percentage point to a seasonally adjusted net 13 percent, the best reading since September, 2007.   Not seasonally adjusted, 16 percent plan to increase employment at their firm (down 2 points), and 6 percent plan reductions (up 1 point).  On a seasonally adjusted basis, job creation plans improved and job openings held at a solid level. Actual job creation remained positive, although modestly so.

•    Sales.  The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months fell 1 point to a net negative 3 percent,  still one of the very best readings since 2007. Thirteen percent cited weak sales as their top business problem, one of the lowest readings since December, 2007, the peak of the expansion. Expected real sales volumes posted a 1 point decline, falling to a net 10 percent of owners expecting gains.

•    Earnings and Wages.  Earnings trends were unchanged at a net negative 18 percent (net percent reporting quarter to quarter earnings trending higher or lower), one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, but there appears to be an improvement in profit trends in place, even if not historically strong. This is one of the best readings since mid-2007 with the exception of a few months in early 2012 when the economy posted decent growth rates for several quarters.

Two percent reported reduced worker compensation and 24 percent reported raising compensation, yielding a seasonally adjusted net 21 percent reporting higher worker compensation, unchanged and the second best reading since the first quarter of 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months (up 1 point). The reported gains in compensation are now solidly in the range typical of an economy with solid growth. Another confusing signal about the economy.

•    Credit Markets. Six percent of the owners reported that all their credit needs were not met, unchanged and only 2 points above the record low. Thirty percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes, 22 percent citing regulations and red tape and 13 percent citing weak sales.

The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 5 percent; more owners expect that it will be “harder” to arrange financing than easier (a 2 point improvement). This is the most favorable reading about credit market conditions since 2006, occurring at a time when the Fed is terminating its aggressive QE3 policy. 

•    Inventories. The pace of inventory reduction was steady, with a net negative 3 percent of all owners reporting growth in inventories (seasonally adjusted).   So, on balance, more firms are reducing inventory than building stocks.

The net percent of owners viewing current inventory stocks as “too low” worsened 1 point to a net negative 3 percent, mild dissatisfaction which will depress inventory investment. Sales trends continued to deteriorate a bit but remained near the best levels in the recovery, just historically weak. Expected real sales did not improve as well, and this contributed to less urgency to rebuild stocks. The net percent of owners planning to add to inventory stocks rose to a net 0 percent. While inventories have been building solidly at the national level, it appears that the small business sector is adding little to the accumulation of stocks reported in the GDP accounts and sales are too weak to produce much liquidation.

•    Inflation.  Twelve percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 2 points), and 25 percent reported price increases (up 2 points).  Seasonally adjusted, the net percent of owners raising selling prices was a net 14 percent, unchanged from June and 15 percentage points higher than December.

Twenty-three percent plan on raising average prices in the next few months (up 1 point) and  only 3 percent plan reductions (unchanged), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 22 percent plan price hikes (up a point and one of the highest readings since 2008).  If owners continue to be successful, the economy will see a bit more “inflation” as the price indices seem to be suggesting.

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Today’s report is based on the responses of 1,645 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of July. Download the complete study at http://www.nfib.com/sbetindex.
*All net percentages seasonally adjusted unless otherwise noted. The net percentage is the percent with a favorable response less the percent of owners with an unfavorable response.

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