NFIB

Small-Business Owners Expect More Economic Growth
07/ 26/ 2005
by Bill Dunkelberg

The most recent revision of estimated growth for the economy in the first quarter of 2005 pegs real growth at 3.8 percent, up from the 3.1 percent original guess. Clearly the economy is moving forward at a nice pace. Small-business owners have seen the outlook correctly as reflected in the NFIB Small-Business Optimism Index. The index readings in recent months have exceeded 100, which means owners sense the current economy to be as good as or better than that in 1986 when GDP grew 3.5 percent for the year.

In the most recent NFIB monthly survey, 15 percent of those surveyed reported increasing their total number of employees, while 11 percent reported reducing their workforce. On balance, all small firms added a net of 0.2 employees per firm, a historically strong figure. Job creation has been solid, matching the growth of the economy. Neither has been spectacular, and that is good, since “spectacular” is always followed by “less than spectacular.” The economy can’t over-perform indefinitely, and steady is the best course.

Earnings have done well: About a quarter of all owners have been reporting improvements in earnings this year. Earnings have been supported by a number of factors, including strong sales gains and more owners reporting higher selling prices than higher labor compensation. Insurance costs remain a problem on the compensation front, receiving more votes for the No. 1 problem than any other factor, even energy costs or taxes.

Owners are very upbeat about the economy as 28 percent expect the economy to improve further by year end, compared to 13 percent who expect the economy to weaken.

The most worrisome factor in the big picture seems to be the price of oil. Indeed, owners of oil are making a lot of money, although the real price of gas (adjusted for the Consumer Price Index or in terms of the number of hours the average employee works to buy a gallon of gas) was higher in the early 1980s than today. Since 1970, we have cut in half the amount of oil we consume per dollar of GDP produced. And, because of the strong economy, the federal deficit is smaller than projected.

The largest risk to growth probably lies in the restoration of the consumer saving rate, now only 0.4 percent of disposable income (down from 6 percent decades ago). It seems that if one wants to save $10,000 this year, it can be done through house appreciation, and therefore, one can spend all income earned. But when house prices stop rising, consumers will have to save out of current income, and this will slow spending. But saving supports investment spending, so more saving is not all bad. In the meantime, 2005 continues to shape up well, and small business is doing its part to make it a good year.

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