09/15/2003
CONTACT: Michelle Dimarob (202) 554-9000
The NFIB Research Foundation's Index of Small Business Optimism made a big leap, gaining 4.1 points in August to come in at 104.7, a record since the monthly surveys began in 1986. Nine of the ten components in the survey posted gains. The lone loser was the outlook for interest rates and credit conditions. Overall, the percent of owners characterizing the current period as a good time to expand operations continues to rise, supporting the likelihood that real growth will gain momentum.
"The very good news was improvement in capital spending plans, inventory investment plans and hiring plans-all a real plus for second half GDP," said William Dunkelberg, NFIB's chief economist and author of the survey. "A record reading on the Index indicates that second half growth may well be stronger than currently anticipated."
The percent of owners expecting the economy to be better in six months climbed 4 points in August, rising to a seasonally-adjusted 42 percent, a very positive reading. Unadjusted, 42 percent expect the economy to strengthen over the next six months and 10 percent expect the economy to weaken (up 1 point). "This Index component has reliably anticipated every period of growth since the 1974-5 recession period," said Dunkelberg. "The last five month's readings are sending a very clear signal-economic activity is on the way up."
Rising insurance costs remained at the top of the problem list for small-business owners. The cost and availability of insurance received 24 percent of the votes in the balloting for the single most important business problem. Poor sales and taxes tied for second with 18 percent of the votes each.
Sales trends turned positive for the first time in over a year as more firms reported higher sales than reported declines. The net percent of firms reporting higher sales quarter to quarter rose from -4 percent in July to 3 percent in August. It is difficult to interpret these numbers with so many firms cutting prices. There was a modest increase in the percent of firms raising average selling prices, but not enough to account for the reported gains. It looks like real sales are on the rise. Eventually this will produce an improvement in the job market. Unadjusted, 34 percent of all firms reported higher sales in the most recent three month period (up 3 points), while 23 percent reported lower sales (down 2 points).
| Optimism Components | Net % | Change |
| Plan to Increase Employment | 14 | +2 |
| Plan to Increase Cap. Outlays | 32 | +6 |
| Plan to Increase Inventories | 6 | +5 |
| Expect Economy to Improve | 42 | +4 |
| Expect Higher Real Sales | 29 | +9 |
| Current Inventory Satisfaction | 2 | +6 |
| Current Job Openings | 21 | +6 |
| Expected Credit Conditions | -5 | -1 |
| Now a Good Time to Expand | 18 | +2 |
| Earnings Trends | -13 | +5 |
The earnings picture improved greatly. Profit trends improved again in August, logging the best performance since 2000. Unadjusted, 25 percent reported higher earnings (up 2 points) and 32 percent reported weaker earnings (down 3 points). This is likely due to prices and the mismatch between price hikes and labor compensation increase. "The trend is good," noted Dunkelberg. "It looks as if second half profit growth will be pretty good."
Employment gains continue to be flat, as small firms reduced overall employment for the 29th month in the last 30. Over the past three months, 13 percent of all firms reported increasing employment an average of 2.4 workers, and 16 percent reported reducing employment by an average of 3.5. employees per firm. Even with sales rising more quickly, firms are not hiring new staff to handle the business. Either they still employ an excess of labor, or actual productivity is on the rise.
The outlook for credit markets deteriorated a bit, with the net percent expecting credit conditions to get better at -5 percent, one point worse than July. Unadjusted, 8 percent expected credit conditions to worsen and 2 percent expected market conditions to ease (unchanged). There are no signs of financial stress in the small-business community. Credit appears to be available and interest rates are very low.
Small-business owners continue to liquidate inventories. The seasonally-adjusted net percent of firms reporting inventory accumulation eased 1 point to -1 percent in August, the 29th consecutive month in which more firms reported inventory reductions than reported gains. Plans to add to inventories gained 5 points, rising to a seasonally adjusted net 6 percent of all firms, a very strong showing. While more firms reported inventory reductions than gains, it was by a 1-point margin and there appears to be a segment of the business community that is anxious to add to stocks.
Capital spending plans were reported by 32 percent of all firms, up 6 points from July. The record low for the monthly surveys occurred last year, 25 percent. Reports of actual outlays in the last six months rose 3 points to 59 percent of all firms.
"Job creation will turn positive over the next month, finally. Capital spending is picking up, slowly as expected, but the direction is good. Inventory accumulation could turn aggressive, adding some real energy to manufacturing and to the GDP math," 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. The NFIB Research Foundation conducts some of the most comprehensive research of small-business issues in the nation. The National Federation of Independent Business (NFIB) is the nation's largest small-business advocacy group. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its 600,000 members in Washington and all 50 state capitals.
