11/09/2004
CONTACT: Michelle Dimarob, (202) 554-9000
Small-business optimism remains high, firms looking for new employees
American small-business owners believe that strong economic growth will continue, registering their 19th consecutive month of 100-plus readings for the NFIB Small Business Optimism Index. Slipping just 0.6 of a point to 103.9, the index remained firm in October, buttressed by strengthening job-creation, capital-spending and inventory-building plans. Adding to the momentum was a 3-point gain in positive earnings trends.
| Optimism Components | Net % | Change |
| PLAN TO INCREASE EMPLOYMENT | 15 | +1 |
| PLAN TO INCREASE CAP. OUTLAYS | 34 | +2 |
| PLAN TO INCREASE INVENTORIES | 7 | -3 |
| EXPECT ECONOMY TO IMPROVE | 30 | -6 |
| EXPECT HIGHER REAL SALES | 22 | -1 |
| CURRENT INVENTORY SATISFACTION | -1 | No Change |
| CURRENT JOB OPENINGS | 23 | +3 |
| EXPECTED CREDIT CONDITIONS | -5 | -2 |
| NOW A GOOD TIME TO EXPAND | 20 | -3 |
| EARNINGS TRENDS | -7 | +3 |
“The outlook for spending and hiring in October is historically solid,” noted NFIB Chief Economist William Dunkelberg, architect of the index. “More hiring, more capital spending and some inventory investment are baked into the fourth-quarter outlook.”
Here-comes-Santa ads will soon erase sky-is-falling campaign messages from customers’ minds, bolstering holiday sales. But inflation will be higher, even with declining energy prices in the quarter, according to data that show small-business price hikes remaining substantially more frequent than a year ago.
With the election uncertainty gone and an incoming Congress that appears more small-business-friendly, owners’ top concerns of health insurance costs and availability, government regulation and excessive taxes are likely to get closer attention. More than half of the owners polled gave the president’s economic policies high ratings.
While those planning to create new jobs rose only 1 point to a net 15 percent, the solid measure is consistent with the high-productivity levels of small firms that fully utilize existing workforces. Only in the late 1990s and early 2000—unusual times for the economy—were higher readings noted.
Firms with at least one hard-to-fill job opening gained 3 points to 23 percent, which is expected to lower the unemployment rate slightly. Sixteen percent turned to temporary or leased employees.
Improving sales trends and solid pricing power boosted the share of those reporting rising profit trends 3 points during the month. This is one of the component’s best readings in the survey’s 30-year history.
One of the brighter spots in the October survey was capital-spending plans, up 2 points to 34 percent of all firms. Those numbers are consistent with actual capital outlays over the past six months, which were reported by 64 percent—the same as last month.
Nearly half of those surveyed said they bought equipment; one quarter acquired vehicles and 5 percent purchased new land for expansion. Fifteen percent improved or expanded facilities and an identical share spent money for new fixtures and furniture.
While down 3 points from the month before, those who view now as a good time to expand is 7 points above year-ago figures. Also below September levels but relatively strong is the 30-percent share of those who expect business conditions to improve over the next six months.
Still positive, but down 1 point from September, is data showing a net 1 percent of small-business owners increasing their inventories. This trend was also reflected in the net percent of owners planning to keep adding to stocks—three points off September’s 10 percent figure, but historically very strong.
GDP growth should get a boost from inventory investment in the fourth quarter, Dunkelberg said, unless sales are even stronger than expected. He stands by his earlier prediction of record holiday sales.
The net percent of firms reporting positive sales trends lost a point, falling to seven percent, but continued a seven-month run in reports of higher sales—the strongest since 2000. Expectations for improved near-future sales gave back a point, falling to a still-solid net 22 percent of all firms.
“We expect small firms to keep building their inventories, but believe sales will rise fast enough to keep stocks relatively lean,” the economist said.
In October, 27 percent reported higher prices while 10 percent reported reductions. Although the spring/summer spike in the frequency of price increases has ended, the frequency of those hikes remains significantly above year-ago levels when 17 percent reported higher selling prices and 12 percent said the opposite.
Seasonally adjusted, the net percent of firms reporting higher-average selling prices was 20 percent, up 1 point from September and well ahead of the 8 percent reporting higher prices a year ago. The frequency of reported price hikes has stabilized at a net 20 percent, still too strong to slow inflationary pressure. “Relatively high inflation is in the cards for this year,” Dunkelberg said.
Both wholesale trades and construction firms reported price hikes—a net 30 percent each—followed by a net 26 percent of manufacturers and a net 15 percent of financial services firms.
Higher-average selling prices were confirmed by 20 percent of retailers, but there was barely a ripple among professional and non-professional firms. Among finance, insurance and real-estate firms, the net share reporting higher prices was 22 percent. Reversing year-ago conditions, production and distribution companies reported more frequent price hikes than small, service-sector businesses.
Plans to raise prices were reported by 29 percent of all firms, seasonally adjusted, up 5 points from September and 11 points ahead of year-ago readings.
A net 20 percent of the owners raised selling prices and almost one-third reported sales gains, compared to slightly more than one-fifth who said they were affected by lower sales. Seasonally adjusted, a net 21 percent said they raised worker compensation, roughly the same share as those reporting higher selling prices.
Twenty-three percent of the respondents reported profit gains, nearly two-thirds crediting stronger sales—up 8 points—and 9 percent pointed to higher selling prices as the reason. In the previous quarter, less than one-third reported lower earnings, of whom 38 percent cited weaker sales or a poor economy. Twenty-one percent blamed materials costs, one-tenth put the burden on insurance costs, lower selling prices were cited by 3 percent and a similar share pointed to regulatory and compliance costs. No one complained about financing costs.
Overall, the environment remains favorable for profits, with rising compensation costs still being balanced against higher-average selling prices. Rising materials costs gained a few more votes as a negative for profits, some of which is due to the cost of energy in the transportation and construction sectors. As oil supply responds to market pricing, this trend should change.
The percentage of those reporting that loans were harder to obtain rose 2 points to a net 5 percent in October. This remains historically low, researchers note. Those expecting easier credit conditions ahead slipped 2 points to a minus 5 percent.
The average reported cost of short-term financing dropped 20 basis points to 6.2 percent. Three percent responded that credit costs and availability was their biggest business problem. Those who reported no difficulty getting their credit needs met slipped one point to 35 percent while 5 percent said they had problems. More than one-third—35 percent—said they borrow at least once a quarter.
Dunkelberg expects the Federal Reserve to nudge the price of government funds upward toward 3 percent, which would raise the cost of short-term credit, a move that will touch off rate increases and be felt by those small-business owners—now nearly half—who have lines of credit.
NFIB’s Small Business Economic Trends is a monthly survey of small-business owners’ plans and opinions. Decisionmakers at the federal, state and locallevels 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. 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.
