05/15/2002
Small-business optimism remained in solid territory at 102.7 in April, but backed down slightly - 1.2 points - from the impressive March reading. April's Optimism Index was led by gains in employment plans and inventory investment - good news for workers. This indicates that economic recovery is underway in America's small-business economy, according to the most recent Small Businesses Economic Trends report from the NFIB Research Foundation.
"Small businesses - particularly in the service sector - have seen the light at the end of the tunnel and are ready to do business," said NFIB Chief Economist William Dunkelberg. "They are stocking the shelves and putting out the 'help wanted' signs. However, while sales are getting better, higher labor costs keep biting into profits."
The cost and availability of insurance held on to second place in the balloting for the single most important business problem, garnering 16 percent of the votes, while taxes received 20 percent for a first place finish. The third place finish went to poor sales with 14 percent of the vote.
SALES: Seasonally adjusted, a net -1 percent reported positive sales trends over the first quarter, a 7-point improvement over March and 18 points over February. Unadjusted, 24 percent of all firms reported higher sales in the most recent three-month period - up 3 points - while 34 percent reported lower sales, down 5 points. A substantial part of the weakness in sales has come from the price side. In many of these cases, higher unit volumes produce lower sales revenues because prices fall.
EARNINGS: Seasonally adjusted, the earnings index was up 2 net points in April. Unadjusted, 17 percent reported that profits were rising - unchanged - but 43 percent reported that earnings weakened, down 2 points. Earnings seem to be improving slightly, but they still have a long way to go before they can be considered healthy profits for small business. The major problems seem to be a lack of pricing power and labor's share of productivity gains.
PRICES: The net percent of firms reporting higher average selling prices rose a point to 2 percent of all firms. This follows readings of -4, -7, -5, -5 and 1 percent over the preceding five months. This was the most prolonged period of price cutting in NFIB survey history and the rise to a net 2 percent raising prices is hardly "pricing power." By industry, the picture is clear - a high incidence of price hikes in the services sector and pervasive price cuts in the production side. Looking ahead, the frequency of planned price hikes rose to a seasonally-adjusted net 18 percent of all firms, up 1 point. Overall, the inflation outlook has become more fragile in that the economy has become bifurcated, with strong upward pressures on prices in the services sector and downward price pressure in the goods sector.
EMPLOYMENT AND COMPENSATION: The worst is over for labor force reductions, with firms adding a seasonally-adjusted average of .04 employees per firm, after eleven continuous months of reductions. The percent of firms with at least one "hard to fill" job opening rose a point to 21 percent of all firms. Still, this level of job openings is consistent with an unemployment rate in excess of 6 percent. A net 21 percent reported raising worker compensation over the past three months, up 1 point from March and 13 points below the record high reached in 2000. Although reports of higher compensation are much less frequent than two years ago, they are high for a "recession" period when labor demand usually softens.
CREDIT CONDITIONS: A net 6 percent of small firms reported harder borrowing conditions, up 1 point. Thirty-seven percent reported all of their borrowing needs met - up 3 points - while 7 percent reported financing difficulties. This indicates a slightly more difficult credit market than a few months ago, but the bulk of the borrowing firms had no problem getting credit. The average interest rate paid on short-term loans rose 30 basis points to 7.2 percent.
INVENTORIES: Firms continued to sell off inventory, with the net percent of firms reporting inventory accumulation over the past three months at -7 percent, seasonally adjusted. This marks the thirteenth consecutive month in which more firms reported inventory reductions than reported gains. However, satisfaction with current stocks is rising and plans to increase inventories on purpose is strengthening, suggesting that the adjustment process has about run its course. Plans to add to inventories rose to a seasonally adjusted net 8 percent of all firms.
CAPITAL OUTLAYS: Capital spending plans fell 2 points to 32 percent of respondents, and reports of actual outlays in the past six months fell 3 points to 62 percent of all firms. The high for this series was reached in the 1995-2000 capital-spending boom when the incidence of planned expenditures rose to 41 percent. In the current environment, following five years of heavy capacity expansion, there is little need for new capital expansion.
"The economy is splitting with the services sector improving and the goods sector suffering," said Dunkelberg. "If you make stuff, you are having problems. There is excess capacity everywhere, so you can't raise prices. You can't even take advantage of unprecedented gains in productivity, since increases in labor compensation are still growing and absorbing much of the productivity gains. On the other hand, service sector firms are aggressively raising prices. In financial services, 38 percent reported higher selling prices. Although 39 percent did report higher worker compensation, 27 percent reported higher earnings. Business is a lot easier if you can raise prices."
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.
NFIB's 2002 National Small Business Summit will be held June 12-15 in Washington, D.C. Wells-Fargo, the leader in small-business financial services, is proud to be Title Sponsor of the 2002 Summit. Other sponsors include MBNA America, The Mills Corporation, NFIB Member Services Corporation and Fed Ex.
CONTACT: Michelle Dimarob, (202) 554-9000
