NFIB

Good News (Almost) Everywhere You Look
05/ 28/ 2004

by Bill Dunkelberg

First, the good news: Small-business owner optimism remained at historically strong levels. The Index of Small Business Optimism came in over 100 for the eleventh month in a row. Remember that the base year for the index, 1986, was a good year for the economy, so index readings over 100 are solid.

More good news: Capital spending plans are strong, with 35 percent of owners anticipating outlays by mid-year, and the percent of owners reporting actually outlays in the six months prior to the survey pushing toward 70 percent. The most recent economic measures of investment spending (from the fourth quarter of 2003) showed spending advancing at a 10 percent annual rate. This is great news, since it was a sharp decline in investment spending in 2000 that sent the economy on a downward slide, leading to the recession. Economists in the USA Today forecasting panel (of which NFIB is a member) anticipate investment spending to advance at a 10 percent annual rate all year. Good news for the economy, and good news for labor productivity growth, which supports higher profits and higher worker pay.

Even more good news: Plans to create jobs remained at the highest level ever attained, which was during the ’80s expansion that created more than 20 million new jobs.

Now for the bad news, or maybe it’s still good news: Pricing power (also known as inflation) is back. This will be good for profits. Reports of increases in average selling prices took another leap, rising to a net 19 percent of all firms. Just a year ago, more firms were cutting prices than raising them. This is the most aggressive price behavior seen since early in 2000 -- the last time price hikes were this frequent (they peaked in June just before economic growth experienced a major deceleration in the third quarter of 2000).

Historically, numbers at this level have not led to serious inflation (as measured by the CPI). Perhaps this is just a relief rally in prices. After years of price cutting, small-business owners now don’t have to cut prices to keep customers. They can even raise them a bit. If this momentum fades, we’re OK. If it continues, the Fed will move sooner rather than later to raise the discount rate and the federal funds target to slow spending and speculation. In the meantime, the economy and the stock market should continue to turn in a good performance.

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 June/July 2004 issue of MyBusiness magazine.