NFIB

Growth Slow and Steady
09/ 17/ 2002

by Bill Dunkelberg

The economy grew in the first quarter, as small business owners had predicted. The 6.1 percent reported growth rate overstates how well we did, however, since 3.5 percent was due just to a cessation of inventory liquidation. Growth was solid; 41 percent of owners expect the economy to improve over the second half of the year and only 9 percent expect some slippage.

The Small Business Optimism Index has been steady for the past few months, with the June reading at 102.1. Seasonally adjusted, 15 percent of small business owners say now is a good time to expand their business, a figure that has inched up all year. Prospects for economic growth and favorable financing are the main drivers of this optimism. Capital markets continue to be supportive. The average rate paid on short term loans was 7 percent in June and only 6 percent reported that it was "harder" to get financing on their most recent attempt. In the early 1980s, over 30 percent reported difficulties.

The profit picture improved a bit, as more firms were able to raise prices. Over the past six months, more firms cut selling prices than raised them, but well over 20 percent reported increasing worker compensation. In June, the percentage of owners reporting higher selling prices rose to 6 percent while the percentage reporting higher worker compensation was steady at 22 percent. Only productivity gains will protect the bottom line in this kind of an environment. The cost of labor is the major expense for most small firms.

Hiring plans strengthened again as well--no big surge, just a gradual improvement all year. This suggests that we may be very near the peak in the unemployment rate for this recession.

Absent any negative surprises, the economy should continue to grow at a solid pace, around trend (2.5 percent per year in real terms). Inflation and interest rates will remain in favorable territory for this year, even with a weakening dollar (which makes imports more expensive). Hopefully as the year finishes, the private sector will replace government as the major engine of growth for the U.S. economy.

NFIB’s Small Business Economic Trends, begun in 1973, is the longest continuous survey of small business optimism and conditions. It is frequently quoted by Federal Reserve Chairman Alan Greenspan and national media. Monthly surveys are sent to more than 2,500 NFIB members and quarterly surveys are sent to more than 7,500 members. The few minutes members spend completing the surveys adds to NFIB’s stature as the source of the nation’s foremost research about small business.

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This article originally appeared in the August/September 2002 issue of MyBusiness magazine.

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