06/08/2004
The little breather that American small businesses took in May is nothing to worry about, say researchers at the National Federation of Independent Business, who noted a slight fading of entrepreneurs' highly optimistic outlook during the month.
| Optimism Components | Net % | Change |
| Plan to Increase Employment | 13 | -1 |
| Plan to Increase Cap. Outlays | 32 | -2 |
| Plan to Increase Inventories | 7 | -2 |
| Expect Economy to Improve | 29 | -5 |
| Expect Higher Real Sales | 30 | 0 |
| Current Inventory Satisfaction | 0 | -1 |
| Current Job Openings | 22 | 1 |
| Expected Credit Conditions | -4 | 0 |
| Now a Good Time to Expand | 22 | 1 |
| Earnings Trends | -6 | 3 |
Slipping a fraction of a point to 104.5, the Small Business Optimism Index continued a 14-month string of readings at or above the 100 level. The Index has averaged 103.4 over the past 14 months, a feat unprecedented in the survey's 17-year history. This strong run confirms researchers' beliefs that 2004 could be the best economy in two decades.
What caused the pause? Worsening inflation continues to worry small-business owners, and energy costs are by no means the whole story. For years, only 1 or 2 percent cited inflation as their most-pressing problem. But, in recent months, this number has climbed to 6 percent-small compared to the record 41 percent reached in the early 1970s, but headed in a troubling direction. This past September, virtually no firms were raising prices, now price hikes are pervasive in all industries.
Plans to raise prices are now double year-ago levels, rising to 30 percent of all firms. Price hikes are more prevalent now than since the late 1980s. One-quarter of owners report higher selling prices, up 3 points from April. A net 59 percent of agriculture firms, 33 percent of those in construction and 29 percent of retailers said they raised prices last month.
Higher selling prices continue to give small firms a boost at the bottom line. Those reporting higher profits climbed three points. This came on top of an 11-point jump in April. These are the best readings since 2000.
More than one-fourth (26 percent) have experienced profit gains. Nearly two-thirds (62-percent) give the credit to strong sales; 12 percent say the up tick was caused by higher selling prices.
The percent of owners reporting higher labor compensation rose a point to 23 percent of all firms. For the second month in a row, the percent of firms raising prices equaled or exceeded the percent raising compensation. This is good news for profits and a trend that hasn't been seen since the 1980s.
However, researchers think small-business owners may be showing a bit of denial when reporting their plans to raise compensation. During April, the indicator lost a point in frequency, falling to 14 percent of all owners, but far more owners will actually raise compensation.
The job markets appear solid, but are not growing at an alarming rate. Repeating April's solid job creation performance, small firms added 0.2 employees each in May. Leading the charge were manufacturing firms, adding 0.6 employees per firm and agriculture, adding an average 0.9 employees per firm.
Those with at least one hard-to-fill job opening rose a point to 22 percent of all firms. This helps keep the unemployment rate low, but good economic news could attract new entrants to the labor force and push the rate up slightly. Temporary or leased-employee use climbed two points to 16 percent.
All nine census regions reported favorable levels of plans to create jobs. The strongest reports came from the Pacific states with a net-30 percent, the East-North Central states with a net-25 percent and the Mid-Atlantic region with a net-24 percent.
The East South Central states were weakest at 9 percent, followed by New England, where only a net-14 percent foresee expansions.
Although reports of capital outlays over the past six months lost two points, falling to 64 percent of all firms, and capital-spending plans fell a point to a still-strong 34 percent, the overall growth environment is very good. Those reporting spending on new capital equipment dropped one point to 45 percent. Twenty-six percent acquired vehicles and 13 percent improved or expanded their facilities.
NFIB Chief Economist William Dunkelberg said investment spending for the economy is growing at roughly a 10 percent annual rate and is likely to continue at that pace for the rest of the year.
Doubling levels reached a year ago, 22 percent now say it's a good time to expand facilities. But there is a signal that winter and spring "exuberance" is settling down: 29 percent expect business conditions to improve, down four points from April and tracking a typical pattern for early in the expansion.
Unchanged at 30 percent were those who expect increases in the real volume of goods and services sold. And as goods and services sell, inventories must be replaced. Small firms are succeeding in building inventories, but progress is impeded by very strong sales. As fast as it goes on the shelf, someone buys it.
For the third month in a row, positive readings were reported. Increased inventories were noted by a net-3 percent, up two points. This comes after nearly three years of negative inventory reports.
Small-business owners are warily eyeing the credit markets these days. The net percent of owners expecting credit conditions to ease was a minus-5 percent, highlighting the fact that more are expecting conditions to tighten than ease in the coming months.
The number of those indicating more difficulty getting loans rose a point to a net-3 percent. But this confirms that monetary policy remains growth-friendly despite hinted changes in Federal Reserve Board policy. Entrepreneurs have no illusions, though. They know that when the Fed announces an increase in the price of money, tougher times will soon follow.
The average interest rate on short-term loans was 6.1 percent, a drop of 40-basis points. Just two percent of owners said credit costs and availability were their most pressing business problem.
Members who reported getting all their credit needs met eased three points to 34 percent, while 5 percent reported problems obtaining financing, a drop of one point. Thirty-five percent said they are borrowing on a regular basis, about the same level of activity as reported for the last 15 years.
This little breather by small firms attests to researchers' views that the "real" economy is doing well. "Not everything is perfect," said Dunkelberg, "but for those in free enterprise, it never is."
NFIB's Small Business Economic Trends is a monthly survey of small-business owners' plans and opinions. Decisionmakers 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. NFIB's 2004 National Small Business Summit will be held June 16-18 in Washington, D.C. More information is available online at www.NFIB.com/summit.
CONTACT: Michelle Dimarob, 202.554.9000
