NFIB

Signaling solid confidence in the economy, small-business owners took a sharply brighter view of the future in March. NFIB's Small Business Optimism Index jumped more than three points to 103.7, the highest reading since 1997. However, that optimism has yet to be fully translated into growth-producing spending.

"Although we could get a robust first quarter for real GDP growth based on stronger inventory growth along with solid consumer spending, the fundamentals still suggest a slower growth rate overall for the year," said NFIB Chief Economist William Dunkelberg. "The NFIB Small Business Optimism Index is signaling growth at a five percent annual rate. However, half the gain in the Index was from expectations. Those expectations must be backed up by real spending - hiring, inventories, capital spending - and so far, reported spending plans don't support anything more than a slow recovery."

For the first time in months, taxes did not outright win the balloting for most important problem facing small business today. Tracking with recent media reports on the increasing cost of health insurance, the cost and availability of insurance tied with taxes for 1st place, each with 19 percent of the vote. The 3rd place finish went to poor sales with 17 percent of the vote.

SALES: The March survey revealed a substantial improvement in sales trends after a near-record decline in February. Looking to the future, the net percent of firms expecting real sales volume to rise in the next three to six months rose to 23 percent of all firms. Unadjusted, 56 percent expect real sales gains over the next six months - up 6 points - while 14 percent anticipate declines, down 3 points.

EARNINGS: Earnings still aren't showing signs of improvement, even with the substantial reversal in sales trends. Seventeen percent reported that profits were rising - up 2 points - but 45 percent reported that earnings weakened, down 2 points. Seasonally adjusted, this represents a 2-point deterioration in the earnings index.

PRICES: For the first time in months, more firms are reporting higher selling prices, with this figure rising 6 points to a seasonally adjusted net 1 percent of all firms. The last four months were the most prolonged period of price cutting in NFIB survey history, and the rise to a net 1 percent raising prices is hardly "pricing power." Unadjusted, 18 percent reported increases in average selling prices in the past three months - unchanged - and 15 percent reported reductions in selling prices, down 1 point.

EMPLOYMENT & COMPENSATION: The worst is over for labor force reductions, with firms shedding a seasonally adjusted average of -.03 employees per firm, after a number of months in the -.20 to -.35 range. Total employment should rise modestly in the coming months, but the pickup in jobs will not keep pace with the growth in the number of people looking for a job. The percent of firms with at least one hard to fill job opening was unchanged at a net 20 percent of all firms. Sixteen percent reported at least one opening for a skilled worker, and 6 percent reported unskilled job openings. This level of job openings is consistent with an unemployment rate in excess of 6 percent.

CREDIT CONDITIONS: A net 5 percent reported harder borrowing conditions, up 2 points. Thirty-four percent reported all of their borrowing needs met - down 6 points - while 7 percent reported financing difficulties. While this means that credit is somewhat more difficult to get than a few months ago, the bulk of the borrowing firms had no credit market problems. For those who did take advantage of credit, the net percent of firms reporting higher rates was 12 percent in March, with rates still falling in response to the final round of cuts by the Fed last fall.

INVENTORIES: Firms continued to sell off inventory, with the net percent of firms reporting inventory accumulation over the past three months at -2 percent, the 12th consecutive month in which more firms reported inventory reductions than reported gains. Firms are less satisfied with current inventory stocks, but on the positive side, with a net 3 percent characterizing stocks as too low.

CAPITAL OUTLAYS: Capital-spending plans gained 2 points, rising to 34 percent of all firms. Reports of actual outlays in the past six months fell 2 points to 63 percent of all firms, still a solid performance.

"There appears to be enough strength in the economy to allow the Fed to start taking back recent rate cuts, leading the federal funds back toward three percent," Dunkelberg said. "In the meantime, rising oil prices will produce the usual inflation scare in the financial markets. As a 'tax hike,' rising oil prices could provide a speed bump to the recovery, but growth will plod ahead for the year."

CONTACT: Michelle Dimarob, (202) 554-9000