NFIB

Get Ready to Grow
04/ 01/ 2004

by Bill Dunkelberg

Here are the headlines: Profit trends are the best since 2000; Hiring plans the strongest since 2000; Capital spending plans the highest since 2000; Reported capital outlays the most pervasive since 2000. And the Small Business Optimism Index hits the highest quarterly reading since the first quarter of 1984, which was the start of one of the best expansions in U.S. economic history. In short, it's been 20 years since small-business owners have been this optimistic.

Profits are indeed improving, with reports of profit-declines falling and reports of quarter-over-quarter gains rising to produce the best reported profit trends since 2000. And nationally, profits are indeed at record levels and cash flows are at record levels as well. After years of cost-cutting, companies are enjoying wider profit margins as sales ramp up. We can't increase costs (primarily through hiring) as fast as sales are growing, thus inventories have fallen for 33 straight months until January. This is great for the bottom line.

Profits also drive capital spending for large and small businesses. The percent of firms reporting capital outlays in the second half of 2003 rose to 65 percent, with strong increases near the end of the year. And plans for capital expenditures in 2004 spiked in December and remained strong early in 2004. Capital spending for the economy was up at an annual rate of 10 percent in the fourth quarter, reflecting new spending by large and small firms.

Hiring plans are strong: 50 percent of companies are hiring, and 17 percent expect to increase the total number of employees at their firms (i.e. job creation). Data on job creation is controversial. The payroll survey says we lost 250,000 jobs in 2003, but the household survey -- which is used to calculate the unemployment rate -- says there were more than 1 million new jobs created. That number includes self-employed, government and agriculture, which is not covered by the payroll survey. The household survey seems to be closer to the truth. As good as productivity is, increasing GDP at a 6 percent annual rate (which is what we did in the second half of 2003) really requires hiring more workers.

The four pistons of the economic engine are firing: Consumption will be driven by more jobs and rising real incomes; investment spending will be very strong, with purchases of equipment and technology offsetting a slower new housing market; government spending is poised for solid growth -- lots of authorization in the new budget; and exports will continue to expand in response to a weaker dollar. And for 2004 at least, inflation and interest rates will remain historically low. But look for them to rise into 2005.

NFIB's Small Business Economic Trends, begun in 1973, is the longest continuous survey of small-business optimism and conditions. It is frequently quoted by Federal Reserve Chairman Alan Greenspan and national media. Monthly surveys are sent to more than 2,500 NFIB members, and quarterly surveys are sent to more than 7,500 members. The few minutes members spend completing the surveys adds to NFIB's stature as the source of the nation's foremost research about small business. Go to www.NFIB.com/research to find the latest reports.

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This article originally appeared in the April/May 2004 issue of MyBusiness magazine.

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