11/17/2003
CONTACT: Michelle Dimarob (202) 554-9000
NFIB's Index of Small-Business Optimism in October revisited the near-record level reached in August, rising to 104.0 -- a gain of 2.1 points. Of ten Index components, eight improved and two deteriorated. In the Index, spending plans for capital equipment, expansion and inventory accumulation, and new workers all gained strength. Historically high readings beginning with August confirmed that GDP growth would be "hot" in the third quarter. By the numbers, growth will be lower in the fourth from the unexpectedly high base levels set in the third quarter, but the fourth quarter is going to be a good one.
"The strong growth predicted by the August Optimism Index materialized, with GDP up a sizzling 7.2 percent at annual rates, the best since Reagan and the early 1980s," said William Dunkelberg, NFIB's chief economist and author of the survey. "The economy is hitting on all cylinders now. Fourth quarter growth will be very strong based on the October Index reading of 104."
| Optimism Components | Net % | Change |
| Plan to Increase Employment | 13 | 3 |
| Plan to Increase Cap. Outlays | 28 | 2 |
| Plan to Increase Inventories | 6 | 3 |
| Expect Economy to Improve | 47 | 4 |
| Expect Higher Real Sales | 28 | 7 |
| Current Inventory Satisfaction | 0 | 2 |
| Current Job Openings | 18 | -1 |
| Expected Credit Conditions | -6 | -1 |
| Now a Good Time to Expand | 19 | 1 |
| Earnings Trends | -14 | 3 |
The percent of owners expecting the economy to be better in six months climbed 4 points in October, rising to a seasonally adjusted 47 percent, a very positive reading. Unadjusted, 48 percent expect the economy to strengthen during the next six months (up 4 points) and 7 percent expect the economy to weaken (down 1 point). Additionally, business owners are reporting now is a good time to expand facilities. "This Index component has reliably anticipated every period of growth since the 1974-5 recession period," said Dunkelberg. "As the percent of owners favorably inclined toward expansion rises, more firms should begin to undertake capital expenditures."
Rising insurance costs remained at the top of the problem list for small-business owners. The cost and availability of insurance received 25 percent of the votes for the single most important business problem. Taxes and poor sales came in at second and third, with 18 percent and 15 percent of the vote, respectively.
Sales trends took a favorable turn in October, with the net percent of firms reporting higher sales quarter to quarter (seasonally adjusted) rising 4 points to a net 3 percent of all firms - the best reading in the past 12 months. The net percent of firms expecting real sales volume to rise in the next three to six months gained 7 points, rising to 28 percent of all firms, seasonally adjusted. Unadjusted, 41 percent expect real sales gains during the next six months, while 24 percent anticipate declines.
Reports of earnings gains reached the second best level since 2000. Unadjusted, 21 percent reported higher earnings (down 1 point) and 34 percent reported weaker earnings (down 1 point). "It's mostly about prices and the mismatch between price hikes and labor compensation increases. But, the trend is still upward - even if erratic," noted Dunkelberg. "Second half profit growth will look pretty good."
Plans to increase total employment rose to a net 13 percent of all firms (seasonally adjusted, net of those planning workforce reductions). This is a low figure compared to the 1990s expansion, but a strong figure compared to the readings in the 1980s expansion, a great job-generating period. Unadjusted, 16 percent planned to expand employment (up 2 points) and 9 percent planned work-force reductions (unchanged). Small firms added a seasonally adjusted average of .23 employees per firm, only the seventh positive month since January 2001. Unadjusted, firms raised employment by .23 workers per firm on average. "Owners say, contrary to popular opinion, jobs are being created," said Dunkelberg.
The outlook for credit markets anticipated some future Federal Reserve tightening, with the net percent expecting credit conditions to get better at -6 percent. Unadjusted, 9 percent expected credit conditions to worsen (up 1 point) and 2 percent expected market conditions to ease (down 1 point). There are no signs of financial stress in the small-business community. Credit appears to be available and interest rates are very low.
NFIB owners now report 31 consecutive months of inventory decumulation -- more firms reporting inventory reduction than inventory building. The seasonally-adjusted net percent of firms reporting inventory accumulation worsened 2 points to -4 percent in October, still more owners are reducing stocks than adding to them in anticipation of increased sales. Overall, it appears that inventory stocks are considered to be "quite lean."
Capital spending plans were reported by 28 percent of all firms, up 2 points from September, but below the recession year average of 31 percent. The record low for the monthly surveys occurred last year at 25 percent - not far below the current reading. Reports of actual outlays in the last six months fell 1 point to 60 percent of all firms.
"It's encouraging to see employment, inventory investment and economic outlook 'on fire.' However, job creation is still disappointing -- productivity is just too good. Firms are producing more, but with the same or less labor. But this productivity bonus won't last - as firms begin to hire more workers the gains will dissipate. Based on the October survey results, my fourth quarter preview includes: unemployment rate, 6.3 percent; real GDP growth, 5.4 percent; and CPI inflation, 1.5 percent," 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.
