NFIB

Small-business optimism continued to slide in March, but the 1.4-point drop was less than half as steep at February's loss of just over three points. The NFIB Research Foundation's survey of small-business owners found lower expectations for sales and the economy in general leading the way down, and prospects for new employment continued to drop.

"Over 80 percent of the decline in the Index was accounted for by a decline in the outlook for the economy and for real sales volumes," said William C. Dunkelberg, NFIB's chief economist and author of the survey. "Fewer owners expect growth, which impacts their hiring and capital-spending plans. Actual profit performance did add to the Index, but it wasn't enough to counter pessimism about the future. All in all, it won't be a good quarter. There was too much cold and snow, energy bills were too high, and there was lots of media 'trash talking' about the outlook."

The portion of owners expecting the economy to be better in six months fell to a net of 7 percent. That's the lowest reading since March of 2001 when the economic slowdown officially started. Readings were lower than this for the 38 months prior to March 2001, as small-business owners saw the slowdown coming. War uncertainties may be having some impact on the outlook, as many expected the war to be over by now, but the start was later than most expected. This pushes any anticipated negative outcomes further into the future while imposing the costs of uncertainty - particularly high oil prices - on the economy for a longer-than-expected period of time. Among the 61 percent of firms viewing the present as a bad time to expand their business, 14 percent cited the political climate, probably war-related concerns.

The cost and availability of insurance expanded its dominance in the balloting for the single most important business problem, garnering 21 percent of the votes. Traditional winner "taxes" trailed with 17 percent and poor sales took third with 16 percent.

Sales-volume trends actually improved in March, but more firms reported lower sales quarter-to-quarter than reported gains. The net percent of firms reporting higher sales was -7 percent, a 4-point improvement over February. Widespread price-cutting is still keeping the lid on gains in sales. The net percent of firms reporting higher average selling prices was unchanged in March at -1 percent of all firms. The 12-month average percent of firms raising prices - net of those cutting prices - is 2 percent, near the all-time 12-month average low of zero percent of all firms reached last year.

Profit trends staged a substantial reversal to the plus side, after turning in the worst performance since the early 1980s in February. The causes were different then, however; low real output in those days versus a loss of pricing power this time, high energy costs and bad weather. Unadjusted, 14 percent reported higher earnings - up 1 point - but 44 percent reported weaker earnings, down 5 points. Earnings these days are mostly about prices and the mismatch between price hikes and labor compensation increases.

Small firms cut a seasonally-adjusted average of .05 employees per firm, the 24th negative month in the past 26. Over the past three months, 11 percent of all firms reported increasing employment an average of 2.7 workers, and 16 percent reported reducing employment by an average of three employees per firm. Plans to increase total employment fell 5 points to a net 1 percent of all firms, the lowest reading since 1990.

Interest rates are still falling for most small-business owners. Eight percent more owners reported their interest rates were lower than higher. The average interest rate was 6.2 percent. Credit remained widely available, with only the slightest hint that credit standards might be tightening. Seven percent reported that loans were harder to get and 2 percent reported that financing got easier.

Small-business owners continued to liquidate inventories. The seasonally-adjusted net percent of firms reporting inventory accumulation went from -2 percent to -6 percent in March, the 24th consecutive month in which more firms reported inventory reductions than reported gains. There were 41 consecutive months of "decumulation" in the early 1990s.

Capital spending plans were reported by 27 percent of all firms, down 2 points. Reports of actual outlays in the past six months fell to 55 percent of all firms, down 3 points. 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, making capital investment these days less attractive.

"Spending plans are very weak - at or near levels reached in the last recession," Dunkelberg said. "The unfortunate convergence of high oil prices, bad weather and war uncertainties could deliver some bad growth news for the first quarter, even though the fundamentals for growth remain in place - low inflation, low interest rates and lots of policy stimulus."

NFIB's Small Business Economic Trends (SBET) is a monthly survey of small-business owners' plans and opinions. The sample for SBET is drawn from the membership of NFIB. In March there were 555 respondents. Decision-makers at the federal, state and local levels actively monitor these reports, ensuring that the voice of small business is heard.

CONTACT: Michelle Dimarob, (202) 554-9000