03/15/2002
Small-business owners were almost as optimistic in February as they were in January, continuing at a level significantly above the doldrums numbers of late 2001. NFIB's Index of Small Business Optimism faded half a point to 100.3 in February. Although hiring plans retreated, capital-spending plans posted a gain and inventory investment plans stayed close to January's strong reading.
"As first predicted in the June 2001 survey, small business is in a 'long-L' recovery," said NFIB Chief Economist Bill Dunkelberg. "After the huge boom of 2000, we were headed into a 'too-much-stuff' slowdown, with capital spending and inventory investment showing weakness. However, by August, the economic climate had improved a bit, suggesting that we would avoid an actual recession. September events, however, led to a decline in real output, as much of our nation's production was impaired by interruptions in transportation and consumers stayed glued to the TV. As normalcy returned in the fourth quarter, we're back to the 'slow growth' that began late last summer."
Highlights of the February survey include:
- There is no credit crunch for the vast majority of small businesses. Only 2 percent called it their most important problem, and only a net 3 percent reported harder borrowing conditions.
- Hiring plans faded from January, falling to a net 7 percent of all firms, suggesting a slower recovery in employment than many had hoped for.
- Higher unemployment is helping small-business owners find better-qualified workers and pay them less. The number of firms reported that finding qualified labor was their most important problem was the lowest since 1996. Seventeen percent reported increasing labor compensation, 17 points below the record set in February 2001, and only 5 percent cited labor costs as their No. 1 business concern.
- Price-cutting continues, as a net -5 percent of all firms reported raising average selling prices. More firms have cut prices than raised them for 4 quarters in a row.
- Capital spending plans rose to 32 percent of all firms in February. Sixty-five percent reported actual outlays in the last six months, up 4 points.
Small-business owners said that the most important problem facing their businesses today is taxes, which garnered 22 percent of the vote. The second place finish went to poor sales with 14 percent of the vote, tied with competition from big business. Rounding out the top three was the cost and availability of insurance with 13 percent.
SALES: The number of firms with lower sales rose again in February, reflecting overall weakness in spending at the end of 2001. The number of firms reporting negative sales trends exceed those with growing sales by 19 percentage points. To a large degree, this is a result of widespread price cutting - the actual volume of goods and services being sold is rising. However, small-business owners are more optimistic about future sales, as the net percent expecting sales to increase rose two points to 23 percent.
EARNINGS: Fifteen percent reported that profits were rising, down 1 point, but 47 percent reported that earnings weakened, up 4 points. Seasonally adjusted, this represents a 2-point deterioration in the earnings index, consistent with the trend throughout 2001. Widespread price reductions have cut into profitability, especially with weaker sales volumes.
PRICES: The net percent of firms reporting higher average selling prices was unchanged at -5 percent of all firms. This follows readings of -4 percent, -7 percent and -5 percent in the past 3 months. This is the most prolonged period of price cutting in NFIB survey history. The frequency of planned price hikes fell a point to a seasonally adjusted net 14 percent of all firms, consistent with continuing price stability.
EMPLOYMENT AND COMPENSATION: For the prior 3 months, 13 percent of all firms reported increasing employment an average of 2.8 workers, and 15 percent reported reducing employment by an average of three employees per firm, almost an "even" event. Employment could still fall modestly in the coming months, but as small businesses begin expanding their employment, the declines will be small. Plans to increase total employment surprisingly fell back to December levels, losing 5 points to a net 7 percent of all firms. Although not a recession number, it is much weaker than expected after the strong January start. A net 17 percent reported raising worker compensation over the past three months, down 6 points from January to the lowest reading since 1993. Plans to raise compensation fell to a net 14 percent of all firms.
CREDIT CONDITIONS: There is a lot of talk about a credit crunch, but there is still no evidence of credit rationing in the small business community, which produces half of the nation's GDP. A net 3 percent reported harder borrowing conditions. Forty percent reported all of their borrowing needs met - up 5 points - while only 4 percent reported financing difficulties. The average interest rate paid on short-term loans rose 10 basis points to 7.3 percent, historically a very low figure.
INVENTORIES: Firms continued to sell off inventory, with the net percent of firms reporting inventory accumulation over the past three months at -4 percent. This follows readings of 0, 1, 1, -2, -4, -2, -5. -1, -6, -4, -6, -5 and -5 in the preceding 13 months, an impressive run of inventory reductions following months of virtually no inventory growth at all. Plans to add to inventories faded a bit from January's strong number, dropping 2 points to 4 percent of all firms. Overall, however, it appears that the purging of stocks is over.
CAPITAL OUTLAYS: Capital-spending plans gained 3 points, rising to 32 percent of all firms. For perspective, the average for 1992 was 29 percent, 32 percent for 1993, 34 percent for 1994, 38 percent for 1995, 37 percent for 1996, 38 percent in 1997, 36 percent in 1998 and 1999, 34 percent in 2000 and 31 percent in 2001. Reports of actual outlays in the past six months rose 4 points to 65 percent of all firms, a solid performance.
"The 'recession' is over," Dunkelberg concluded. "We certainly didn't get the back-to-back quarters with declines in real GDP. The National Bureau of Economic Research will have to sort out the details on a monthly basis. A net 38 percent of small-business owners expect the economy to be better in six months, sustaining the high level of optimism that began to build in the fourth quarter of 2001. The October reading of 24 percent signaled the resumption of growth in the fourth quarter. Growth in the first quarter could reach the 3 percent level."
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NFIB's Small Business Economic Trends is a monthly survey of small-business owners' plans and opinions. Decision-makers at the federal, state and local levels actively monitor these reports, ensuring that the voice of small business is heard. NFIB's research department conducts some of the most comprehensive research of small-business issues in the nation.
CONTACT: Michelle Dimarob, (202) 554-9000
