NFIB

Small-Business Labor Markets Are Strong
09/ 27/ 2005
by Bill Dunkelberg

The U.S. economy continues to roll along, just as small-business owners predicted. Analysts are now marking up their forecasts to match the predictions of small businesses. Hiring plans strengthened and inventories were reported relatively low, while plans to add to inventories as we go into the fourth quarter strengthened. Capital spending plans have remained steady as have actual capital outlays, reported each month by about two-thirds of the owners.

More than 50 percent of the owners report they are hiring or trying to hire, with about three-fourths complaining about the lack of qualified applicants. Twenty-one percent have job openings, and 14 percent plan to expand employment—a higher number than most quarters in the 32-year history of the NFIB surveys. Seventeen percent increased employment in recent months; 10 percent reduced their workforce; and the job numbers reported by the government have looked as good as expected. Labor markets are solid.

Inflation, the top worry of the Fed, has lost some steam in the small-business sector. Twenty percent of the owners reported higher selling prices, down from the 25 percent peak reached earlier this year but well ahead of the average 3 percent reporting higher prices in 2003. Most of the pressure on prices is coming from the construction sector and manufacturing. The incidence of price hikes in the service sector has faded. Inflation based on the Consumer Price Index is running about 3 percent, probably the upper edge of what the Fed will tolerate. Excluding food and energy, the inflation rate is 2 percent. So, much of the future of inflation depends on the course of energy prices. So far, long-term interest rates implicitly express a confidence that inflation will stay low.

At the macro level, a number of cross-currents are at play, none of which pose an immediate threat to the economy in the near term. The price of oil for future delivery has new record highs, as has the pump price of gas. This means users of oil products have less money to spend on other things since our incomes did not go up by the same amount. However, owners of oil have, dollar for dollar, the same amount more to spend.

Higher oil prices have undoubtedly impacted spending, a negative impact that has been offset by consumers spending 100 percent (0 percent savings rate) of their after-tax income. This is made possible by the huge appreciation of house values which "saves" billions of dollars on our balance sheets without saving out of our current incomes.

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