NFIB

Optimism Remains Steady

America's small-business owners reported the first upward movement in prices in more than a year, according to NFIB's Small Business Economic Trends. The price increases continue to lag behind increasing labor costs and hardly mark the return of "pricing power," but did allow more businesses to claim increased earnings. The Index of Small Business Optimism has stayed essentially steady since April, coming in at 102.1 in June.

"As SBET reported twelve months ago, the recovery will be of the 'long L' variety, much like the 1990-91 recession followed by the 'jobless recovery,'" said NFIB Chief Economist William Dunkelberg. "There is nothing in sight that will significantly drive up growth or drive down unemployment."

The net percent of owners expecting the economy to be better in six months fell 5 points from May's reading to 33 percent of all firms. Unadjusted, 41 percent expect the economy to strengthen over the next six months - down 3 points - and 9 percent expect the economy to weaken, up 3 points. The loss takes this measure out of the "amazingly high" into very solid optimistic territory.

The cost and availability of insurance continued its strong showing in recent months as the second-most important business problem, garnering 20 percent of the votes, just 1 point shy of 1st place winner taxes, which received 21 percent. The 3rd place finish went to poor sales with 14 percent of the vote.

SALES: Sales trends reversed in June, showing a positive balance for the first time in 14 months. The net percent of firms reporting higher sales was 2 percent, an 8-point improvement over May's figure and far ahead of the -19 reading in February. Thirty-two percent of the "non-professional service" firms reported higher nominal sales. In retail as well, 32 percent of firms reported improved sales trends as well, a big improvement, while only 28 percent reported reversals, a big decline. The previous month had seen 25 percent of owners reporting higher sales and 35 percent reporting lower sales. The net percent of firms expecting real sales volume to rise in the next three to six months eased from near record levels to a solid 22 percent of all firms, seasonally adjusted, a loss of 9 points.

EARNINGS: More price hikes and higher sales volumes produced more profit gains in June. Unadjusted, 20 percent reported that profits were rising - up 2 points - and 37 percent reported that earnings weakened, down 7 points. Seasonally adjusted, this represents a 4-point improvement in the earnings index.

PRICES: The net percent of firms reporting higher average selling prices jumped to 6 percent of all firms. And, no surprise, the percent of firms reporting improvements in sales and in profits also picked up. By industry, the picture is clear - a high incidence of price hikes in the services sector; pervasive price cuts in the production side. The frequency of planned price hikes rose 2 points to a seasonally adjusted net 21 percent of all firms. This is the highest reading since February 2001. Only time will tell if small-business owners can make these plans stick.

EMPLOYMENT AND COMPENSATION: Although there were sporadic signs of labor reductions in the second half of 2000, the reduction in labor inventory got serious starting in March 2001. Since then, small business reported labor force reductions in 14 out of 16 months, including this June. Small firms added a seasonally adjusted average of -0.14 employees per firm. Twenty-two percent reported raising worker compensation over the past three months, unchanged from May and 12 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 softens.

CREDIT CONDITIONS: A net 4 percent of small firms reported harder borrowing conditions, down a point from May's reading. Thirty-four percent reported all of their borrowing needs met, also down 1 point, while 5 percent reported financing difficulties, unchanged. The bulk of the borrowing firms had no credit market problems. The average interest rate paid on short-term loans fell 40 basis points to 7.0 percent.

INVENTORIES: The inventory sell-off seems to be running out of steam, with the net percent of firms reporting inventory accumulation rising to -2 percent from -8 percent in May. Satisfaction with current stocks is rising. A net -1 percent reported inventories "too low," up 3 points from May and although not as good as the very rare +3 percent March reading, an historically strong reading. A seasonally adjusted net 8 percent of all firms reported plans to add to inventories, a 3-point gain in the strength of that indicator.

CAPITAL OUTLAYS: Capital spending plans fell 3 points to 29 percent of all firms. Following five years of notable capacity expansion, firms are less than anxious in the current environment to expand further. Reports of actual outlays in the past six months rose 2 points to 62 percent of all firms.

"There is an imbalance between price hikes and increases in labor compensation," Dunkelberg said. "The equation has been partially offset by rather impressive gains in labor productivity which have kept unit labor costs under control. But strong compensation performance has kept the pressure on profits. It is clear that inventory accumulation will be strong, and this will help manufacturers. Price hikes will still be hard to come by, but do seem to be increasing in frequency. Good inflation news. Hiring and capital spending will not be growth negatives but will not add a lot of energy to growth this year."



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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