NFIB

NFIB's Small Business Optimism Index fell 3.1 points in February with sales and expectations for the economy showing significant deterioration. February also marked a six-point jump in small-business owners who said that political conditions were contributing to their view that this is not a good time to expand their business - the first signal that "war jitters" have hit small business.

"The three-point decline in the Index was substantial and takes our growth forecast down to two percent, said NFIB Chief Economist Bill Dunkelberg. "It now appears that 'political' factors are impacting capital spending plans, although they are far from the largest concerns of those who think the current period is not a good time to expand. The longer we sit on the verge of war, the more likely that war uncertainties will start to take a toll on the real economy. However, first quarter growth will be dominated by real factors like very bad weather across large portions of the U.S. and energy prices that will remain high as long as war uncertainties loom."

The cost and availability of insurance maintained the top spot in the balloting for the single most important business problem, garnering 20 percent of the votes, besting taxes and poor sales, each with 19 percent of the vote.

Sales trends turned in another weak performance, rivaling some of the worst readings registered in the past two years. The net percent of firms reporting higher sales was -11 percent, a 2-point decline. While units were moving off shelves, it was only because of price cuts. The net percent of firms reporting higher average selling prices was virtually unchanged in February at -1 percent of all firms. With little ability to raise prices, profit trends turned in the worst performance since the early 1980s. But the causes were different: a loss of pricing power, high-energy costs and bad weather, not a lack of fundamental demand. Unadjusted, 13 percent reported higher earnings - down 4 points - but 49 percent reported weaker earnings, up 6 points.

Small firms added a seasonally adjusted average of .06 employees per firm, only the second positive month in the last 25. Over the past three months, 10 percent of all firms reported increasing employment an average of 3.8 workers, and 13 percent reported reducing employment by an average of 3.1 employees per firm. Seventeen percent of the owners reported raising worker compensation over the past three months, the lowest reading since 1993.

Credit markets remain friendly, with only the slightest hint that credit standards might be tightening. A net 5 percent reported "harder" borrowing conditions. The average interest rate paid on short-term loans was 6.8 percent, which is historically quite low, but is a very high real interest rate for firms that are reducing their average selling prices.

Small-business owners continued to liquidate inventories, but the rate of reduction seems to be slowing. The seasonally adjusted net percent of firms reporting inventory accumulation improved 1 point to -2 percent in February, the 23rd consecutive month in which more firms reported inventory reductions than reported gains.

Capital spending plans were reported by 29 percent of all firms, down 2 points. Reports of actual outlays in the past six months fell to 58 percent of all firms, down 5 points after several months of gains. The current readings are comparable to the 1992-93 experience, but that recession was not preceded with the huge capital-spending boom that preceded 2001. In the current environment, following five years of heavy capacity expansion, firms have less need to move ahead with new capital expansion.

"Overall, there is little to suggest that economic growth will take off any time soon. Consumer sentiment is low compared to 2000, but well ahead of past recession readings. No speedy recovery is revealed in these numbers, but no downturn either. Liquidity has never been higher, but stock markets can't go too far until profits show more convincing gains," Dunkelberg concluded.

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