11/15/2001
Small-business optimism recovered slightly in October from the sharp drop that followed the Sept. 11 terrorist attacks. Compared to the entire month of September, optimism remained steady at 96.3. This according to the monthly Small Business Economic Trends report released today by the NFIB Education Foundation.
The October Index of Small Business Optimism was unchanged from the overall September reading, but 2.1 points above the Index reading for the post-attack period. Of the ten Index components, four posted a gain, five posted a decline and one was unchanged. None of the ten components changed substantially, but hiring plans continued their long, slow descent, falling to their lowest level since 1993.
"The terrorist attack infected the economy with the worst and most contagious disease of all - uncertainty," Dunkelberg said. "Now that the immediate shock has been absorbed, the big problem is the spread of uncertainty and its impact on decision-makers not immediately impacted by the attack."
Some of the highlights of this month's data include:
- Despite the drop in hiring plans to 1993 levels, a surprisingly large portion of firms reported that finding qualified labor (skilled or unskilled) was the most important problem faced by their firm. The percent reporting hard-to-fill job openings returned to July levels.
- More than a quarter of firms reported increasing labor compensation. Few cited labor costs as their number-one business concern.
- The number of firms reporting increasing selling prices fell from September and continues well off the peak reached in June 2000.
- Capital spending plans fell in October, but nearly two-thirds reported actual outlays in the last six months.
Taxes won the balloting for most important problem facing your business today with 21 percent of the vote. The second place finish went to poor sales, collecting 16 percent of the vote and closely followed by the availability of qualified labor with 15 percent. In fourth place, the cost and availability of insurance with 14 percent, followed by government regulation and red tape with 11 percent and competition from large business with 10 percent. Credit availability and cost were not on the radar screen, a top issue for only 2 percent of all business owners.
SALES: Reports of sales gains deteriorated in the most recent three month period from September's -3 reading to -6 percent. The pre-attack figure was -4, the post figure -5. Customers remain reluctant to open their wallets and spend. Unadjusted, 25 percent of all firms reported higher sales in the most recent three month period (down 2 points), while 27 percent reported lower sales (up 3 points). The surge in October retail sales are due primarily to an overlay of the last three weeks of normal spending from September onto the normal spending for October.
EARNINGS: Eighteen percent reported that profits were rising (down 1 point), but 36 percent reported that earnings weakened (down 1 point). Seasonally adjusted, this represents a 3-point improvement over the September reading. Apparently these firms are managing costs well. The third quarter improvement in productivity suggests labor hours were cut faster than GDP fell.
PRICES: The net percent of firms reporting higher average selling prices fell to 2 percent of all firms, last this low in early 1999. Unadjusted, 13 percent reported increases in average selling prices in the past three months (down 1 point) and 14 percent reported reductions in average selling prices (up 2 points). With inflation low, the Fed will have to continue to cut rates if its goal is to take the federal funds rate down to or below the inflation rate.
EMPLOYMENT AND COMPENSATION: Reports of labor force reductions were more frequent prior to September than in the September-October period. Overall, small businesses shed an average of .05 workers per firm, seasonally adjusted. However, the post-attack layoffs "hardened" the employment picture, raising the unemployment rate to 5.4 percent, nearly identical to the 5.3 percent rate anticipated by the NFIB surveys in the third quarter. The October figures indicate a rise to 6 percent by the end of the year. Twenty-six percent of firms reported raising worker compensation over the past three months, unchanged from September and 5 points below the record high reached 14 months ago.
CREDIT CONDITIONS: The average interest rate paid on short-term loans rose 10 basis points to 8.2 percent, remaining virtually unchanged. The November cuts in the federal funds target rate and the discount rate will trigger another round of reductions in short-term rates. The percent of firms citing credit issues as their number-one business problem remained at a very low 2 percent of all firms, and virtually all borrowers reported no difficulty satisfying their borrowing needs.
INVENTORIES: Firms continued to sell off inventory, with the net percent of firms reporting inventory accumulation in September at -4, up 2 points from September. Satisfaction with existing stocks deteriorated on a seasonally adjusted basis to its lowest level since 1996, with 13 percent reporting stocks "too high" (up 1 point) and 6 percent reporting stocks "too low" (unchanged). With weak forecasts for future sales, it is surprising that dissatisfaction is not more widespread, perhaps reflecting the success of the yearlong process of inventory liquidation.
CAPITAL OUTLAYS: Capital spending plans lost a point from the September reading, falling to 27 percent of all firms, but equal to the July figure. Capital spending plans have been weak for some time, but did manage to gain 2 points from the post-attack level. Reports of actual outlays in the past six months rose 1 point to 63 percent of all firms, not a bad level at all, but this is more reflective of economic conditions prior to the Sept. 11 attacks.
"The NFIB model for GDP growth anticipates very weak but positive growth in the fourth quarter," Dunkelberg said. "Small business accounts for only half of the economy, so even if we do our part, weakness elsewhere could produce an overall negative quarter. Compared to past recession periods, the survey measures look reasonably good. It's the downward tilt that makes it worrisome, combined with the possibility of further disruptions by terrorist activity. The descent is not very sharp, but we haven't hit a clear bottom."
CONTACT: Michelle Dimarob, (202) 554-9000
