01/15/2004
Toasting the New Year with spirits lifted by more than holiday champagne, the nation's small-business owners' outlook bubbled up 1.6 points to 106.9 in December, less than a point shy of the National Federation of Independent Business's (NFIB) Index of Small-Business Optimism's 1983 record and the fourth highest in the survey's history.
"It doesn't get much better than this," noted NFIB Chief Economist William Dunkelberg. NFIB's Small Business Economic Trends, conducted by the NFIB Research Foundation, 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.
| Optimism Components | Net % | Change |
| Plan to Increase Employment | 20 | 8 |
| Plan to Increase Cap. Outlays | 38 | 9 |
| Plan to Increase Inventories | 9 | 4 |
| Expect Economy to Improve | 49 | -3 |
| Expect Higher Real Sales | 35 | 4 |
| Current Inventory Satisfaction | -6 | -5 |
| Current Job Openings | 20 | 2 |
| Expected Credit Conditions | -6 | 1 |
| Now a Good Time to Expand | 24 | 0 |
| Earnings Trends | -13 | -4 |
Six of the key index components led the jump with substantial increases, while the three that slumped had small declines. Among the leaders, spending plans for capital equipment and hiring plans surged, both rising enough to account for the index's entire gain. Upticks also appeared in job creation, inventory investment and sales expectations. Although the percent viewing the current period a good time to expand was unchanged from the 24 percent level reached in November, this component of the index is at a historically high level. "The economy is ready to rock and roll," Dunkelberg said, "fast at first, slower as policy adjusts to stronger private sector growth and a better balance between the sectors is reached." Still unwelcome guests at the small-business owners' party are the lingering hangovers caused by their top problems. The cost and availability of insurance and taxes remained first and second with 28 percent and 18 percent, respectively, citing them as their number one business problem. Complaints about weak sales, eased three points to 13 percent but held its third place ranking. Capital spending plans uncorked their highest index reading in years, surging nine points to 38 percent of all firms. Adding to the merriment, reports of actual outlays in the past six months climbed three points to 63 percent. Dunkelberg said capital spending has been the missing piece in the recovery puzzle, but it now appears to have fallen into place. All industries except finance, insurance and real estate, and professional services reported increases. Construction, wholesale and non-professional services had large gains. Optimism also brimmed over into hiring plans, which swelled eight points to a net 20 percent, the highest reading since 2000. Hiring for the month added a seasonally adjusted .19 employees per firm, nearly double the previous month and pushing the fourth quarter "in the black" for job creation. Hard-to-fill openings rose two points to an adjusted one-fifth of all firms, well below the 35 percent 2001 mark, but above the recession reading of 10 in 1991, indicating a decline in the unemployment rate. This bodes well for improved job creation early in the year, the economist said, adding: "Substantial job creation is about to get underway." Despite strong sales and high interest in re-stocking their shelves, small-business owners' satisfaction with current inventories tumbled five points to a net minus-6 percent (the percent reporting inventories too low minus the percent reporting inventories too high). Those planning to boost inventories netted a near-record four-point increase to 9 percent, seasonally adjusted. Sales trends revealed some of the best readings in a year as the net percent of firms reporting higher quarter-to-quarter sales rose a point to 5 percent. This is a clear indication that the volume of real sales activity is rising and owners anticipate that this will continue. The number of respondents expecting real sales volume to go up in the next three to six months gained four points to a net 35 percent. This comes on the heels of a seven-point gain in October and a three-point hike in November. After hitting its best level since 2000 in November, earnings-gains reports slipped a bit but posted a historically strong reading. Now one-fifth of owners, five points fewer, claimed higher earnings. An unchanged 32 percent said earnings were weaker. Stronger sales and some pricing power are helping the bottom line, but hiring demands will slow profit gains. Adjusted for seasonal impact, 21 percent said they increased employee compensation and 6 percent reported higher prices. Looking ahead, owners who expect better credit conditions eased up a point to a minus-5 percent. Virtually all borrowers reported no difficulty satisfying their credit needs, but the party may be about to end for those seeking lower rates. The Federal Reserve is showing little inclination to keep pushing rates down. In December, the average interest rate paid on short-term loans fell to 6.2 percent. Regular borrowing activity was reported by 30 percent of firms surveyed, a decline of four points. In spite of losing three points to 49 percent, the outlook for business conditions continues among the highest readings in two decades. Nearly a quarter of those polled (24 percent) think now is a good time to expand their facilities. While unchanged from November, this level is well ahead of March's low 7 percent and the best reading since January 2000. Half were encouraged by economic conditions-up nine points. Of those with an opposite view of future economic conditions, two thirds cited the economy as reason for their worry. The percent of owners expecting the economy to be better in six months climbed 4 points in November, rising to a seasonally adjusted 51 percent -- the highest reading since the last three quarters of 1983. Unadjusted, 51 percent expect the economy to strengthen during the next six months (up 3 points) and 5 percent expect the economy to weaken (down 2 points). "Readings for the third quarter confirmed that it was shaping up to look like the early 1980s," said Dunkelberg. "The October and November readings anticipate a strong fourth quarter."
Rising insurance costs remained at the top of the problem list for small-business owners. The cost and availability of insurance received 28 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 16 percent of the vote, respectively.
Sales trends continued their favorable run in November, with the net percent of firms reporting higher sales quarter to quarter (seasonally adjusted) rising 1 point to a net 4 percent of all firms -- the best reading in the past 12 months. With more firms successfully raising prices, reports of higher revenue and improved profits should become more frequent. The net percent of firms expecting real sales volume to rise in the next three to six months gained 3 points, rising to 31 percent of all firms, seasonally adjusted.
In November, reports of earnings gains reached the best level since 2000. Unadjusted, 25 percent reported higher earnings (up 4 points) and 32 percent reported weaker earnings (down 2 points). "A moderation in labor cost increases is also giving profits a boost," noted Dunkelberg. "Still, compensation gains are far more frequently reported than price hikes, in all but financial services and real estate."
Small firms added a seasonally-adjusted average of 0.1 employees per firm. During the past three months, 12 percent of all firms reported increasing employment an average of 4.5 workers, and 12 percent reported reducing employment by an average of 3.8 employees per firm. "We're finally seeing some real job generation. Firms retained their best workers and these have been 'magnified' through management improvements and the capital investments made in the late 1990s. Productivity has grown at twice the historical rate -- it won't last forever -- but it will be with us for a while longer, dampening the demand for labor. Spending will exhaust the excess labor capacity by early next year, and hiring will take off," said Dunkelberg.
The outlook for credit markets anticipated some future Federal Reserve tightening, with the net percent expecting credit conditions to get better at -7 percent. Unadjusted, 8 percent expected credit conditions to worsen (down 1 point) and 1 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 members now report 32 consecutive months of inventory decumulation -- more firms reporting inventory reduction than inventory building. The seasonally-adjusted net percent of firms reporting inventory accumulation improved 3 points to -1 percent in November, still more business owners are reducing stocks than adding to them. Overall, it appears that inventory stocks are considered to be "quite lean."
Capital spending plans were reported by 29 percent of all firms, up 1 point from October, but still below the recession year average of 31 percent. The record low for the monthly surveys occurred last year at 25 percent. Reports of actual outlays in the last six months were steady at 60 percent of all firms.
"Job creation has finally gone positive, but it won't return to the 'binge' rates of the late 1990s. In the short run, economic growth will have to exceed productivity gains in order to spur job creation -- and this is already happening in some sectors and regions. Inventory investment plans are strong -- good news for manufacturers (some of them overseas). Look for fewer holiday sales -- there is less on the shelves to sell and more paychecks looking for something to buy. All in all, 2004 is set to be one of the best years for the economy in the past 20 -- ceteris paribus -- if all things remains the same, of course," Dunkelberg concluded.
[Note to editors: Beginning in February, the SBET will be released on the second Tuesday of the month.]
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.
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