06/ 01/ 2005
by Bill Dunkelberg
The latest buzz word on Wall Street is “soft spot.” It’s not clear what this means, but apparently, it’s a concern that growth in the economy is not keeping pace with the impressive rates in 2004. Seems like Wall Street is never satisfied. You can see that volatility is the face of life of expansions by looking at the quarterly growth rates in GDP during the expansion periods over the past two decades. Hanging on to every daily statistic is the task of traders—not investors. Most forecasters still have the economy growing well above trend this year.
The NFIB Small-Business Optimism Index has declined steadily since it reached a record high last November. The Index values last year correctly called the strength in the economy in spite of the incessant chorus from critics that the sky was falling. Obviously, this was not the case. Voters may or may not have voted their pocketbooks, but the economic models correctly called the election, and small-business owners correctly called the economy.
In recent months, reports of job creation have been very good and, until March, plans to create new jobs were also strong. The Household Survey, which includes self employment and the agriculture sector, showed very strong job creation. Small-business owners reported that they were still short on inventory and planned to aggressively add to stocks in the coming months.
Plans to make capital outlays on new equipment, software and plant expansion were historically very solid and displayed increasing strength since the beginning of the year. Overall, hiring, capital spending and inventory accumulation plans all support continued solid economic growth.
The anticipated rise in the inflation rate, beyond the impact of high energy prices, is appearing. Since December, the net percent of owners reporting higher average selling prices has risen from 15 percent to 25 percent, the highest level since June 2004. Price pressures have shifted from the service sector to manufacturing and construction and the wholesale trades. From a profit perspective, this has been good, matching the net percent of owners reporting higher labor compensation and helping advance reports of rising profits.
What’s bothering small-business owners? For some, energy costs are important but overall haven’t hit the radar screen. The cost and availability of insurance remain top on the list of concerns and, of course, taxes. Overall, the NFIB survey findings are following a familiar path—much like the early to mid stages of the last two expansions—and that’s good news!
