02/15/2002
The politicians in Washington may not have heard, but America's entrepreneurs are declaring that the recession is over. The Small Business Optimism Index jumped 3.1 points in January, its third straight monthly increase and the strongest indication to date that a gradual recovery is underway. NFIB's Small Business Optimism Index--among the leading indicators of the downturn as early as last July--stood at 103.5 in January, the most upbeat reading from small business since the first quarter of 2000.
"The recession of 2001 was a classic case of overproduction," said NFIB Chief Economist Bill Dunkelberg. "We simply had too much stuff. Manufacturers produced too much, retailers ordered too much and employers hired workers to produce all that stuff. Eventually consumers ran out of steam, having produced a couple of record car and housing years. After a couple of quarters liquidating excess inventory, small businesses are optimistic about the months ahead."
- The shelves are bare and small businesses are ready to add inventory. Plans to add to inventories rose 10 points to a record high 12 percent of all firms.
- Hiring plans jumped 11 points to a net 18 percent of all firms, a substantial gain in prospective job creation.
- Recession-induced layoffs are easing the shortage of qualified workers. During the economic boom of 2000, finding qualified workers in the tight labor market was a huge problem. Now only 22 percent of all firms reported finding qualified labor as the most important problem faced by their firm, the lowest reading since 1996.
- Businesses have been clearing inventory by cutting prices. A net -1 percent of all firms reported raising average selling prices--more firms are cutting prices than raising them.
- While the number of firms planning capital spending in the next six months fell to 29 percent of all firms in January, 61 percent reported actual outlays in the last six months, up 2 points from December.
The net percent of owners expecting the economy to be "better" in six months rose 1 point to 43 percent of all firms, the highest reading since 1992 and a clear reversal of the -16 percent reached in December 2000, which signaled the imminent arrival of the recession. Historically, readings this strong have been quickly followed by growth in the real economy.
Taxes won the balloting for most important problem facing businesses today with 24 percent of the vote. The second place finish went to poor sales with 17 percent of the vote followed by the cost and availability of insurance with 15 percent.
SALES: Comparing sales gains in the fourth quarter to the third, a record percentage of firms gave a "thumbs down" report. Seasonally adjusted, a net -13 percent reported positive sales trends. The figure was negative throughout 2001, indicating that sales have been weakening and have not yet turned around on a lagged comparison basis. Expectations for the coming year are much better, though. The net percent of firms expecting real sales volume to increase in the next three to six months rose 17 points to 33 percent of all firms, this after rising 10 points in November and in December. It is the strongest reading since January of 2000, a very strong growth quarter.
EARNINGS: Sixteen percent reported that profits were rising--unchanged--but 43 percent reported that earnings weakened, up 3 points. Seasonally adjusted, this represents a 3-point deterioration in the earnings index. Widespread price reduction has cut into profitability, especially with weaker sales volumes.
PRICES: The net percent of firms reporting higher average selling prices remained negative at -1 percent of all firms, seasonally adjusted. This follows readings of -6 percent and -4 percent in the last two months of 2000. This is the most prolonged period of price cutting in NFIB survey history. The frequency of planned price hikes rose to a seasonally adjusted net 15 percent of all firms, up 2 points, but historically low.
EMPLOYMENT AND COMPENSATION: Overall, small businesses shed an average of .36 workers per firm, seasonally adjusted. The percent of firms with at least one "hard to fill" job opening fell 2 points to 18 percent of all firms, seasonally adjusted. Plans to increase total employment surged 11 points to a net 18 percent of all firms. However, the unemployment rate can be expected to rise above 6 percent. Twenty-five percent reported raising worker compensation over the past three months, up 3 points from December.
CREDIT CONDITIONS: The average interest rate paid on short-term loans rose 10 basis points to 7.2 percent, the second lowest rate ever reported in the survey (series began in 1980). A net 3 percent reported "harder" borrowing conditions, up 1 point. The bulk of the borrowing firms had no credit market problems, with 35 percent reported all of their borrowing needs met while 5 percent reported financing difficulties.
INVENTORIES: Plans to add to inventories surged 10 points, rising to 12 percent of all firms. This after months of firms selling off inventory, with the net percent of firms reporting inventory accumulation over the past 3 months falling to -11 percent (seasonally adjusted), up 6 points and a new record incidence of reductions. This follows readings of 0, 1,1, -2, -4, -2, -5, -1, -6, -4, -6 and -5 in the preceding 12 months, an impressive run of inventory reductions following months of virtually no inventory growth at all.
CAPITAL OUTLAYS: Capital spending plans lost 2 points, slipping to 29 percent of all firms. Reports of actual outlays in the past six months rose 2 points to 61 percent of all firms, a fairly low spending rate, but not crashing and tanking.
"Assuming that the recession is over, it appears that the real economy did not slip very far. Unemployment is not going to get seriously high--consumers refinanced instead of paying off debt and several years of record car and home sales could slow spending in these sectors in 2002," Dunkelberg concluded. "On the plus side, government spending will fill some of the void, rising at double-digit rates. Thus, the recovery will be the `long L' type, with growth too slow to substantially reverse the current job situation."
CONTACT: Michelle Dimarob, (202) 554-9000
