04/11/2006
CONTACT: Melissa Sharp, (202) 554-9000
| Optimism Components | Net % | Change |
| Plan to increase employment | 9 | -7 |
| Plan to increase capital outlays | 31 | -4 |
| Plan to increase inventories | 3 | -4 |
| Expect economy to improve | -5 | -8 |
| Expect higher real sales | 12 | -16 |
| Current inventory satisfaction | 0 | +2 |
| Current job openings | 23 | -3 |
| Expected credit conditions | -7 | 0 |
| Now a good time to expand | 19 | -1 |
| Earnings trends | -12 | +3 |
WASHINGTON, D.C.— Optimism among small-business owners took an unexpected tumble in March. The NFIB Small-Business Optimism Index lost 3.5 points, falling to 98.0 (1986=100), two points below the 30-year average. While profit trends improved, inventory investment and reported sales trends remained strong (virtually unchanged from February), labor market indicators sagged and capital spending plans faded along with weaker expectations for gains in real sales.
Declines in job creation plans and job openings accounted for 30 percent of the drop in the index, weaker real sales expectations 40 percent, and the decline in the outlook for overall business conditions contributed 20 percent of the drop.
“Although the first quarter will be very strong, something spooked small-business owners in March about the future course of the economy,” said NFIB Chief Economist William Dunkelberg. “The decline could indicate that owners think the economy is strong, but they don't expect it to get any better, or the economy is weak and they expect growth will slow substantially. The April survey could provide the answer.”
The percent of owners reporting higher average selling prices fell six points to a net 17 percent, good news for those worried about inflation. Twenty-two percent reported higher labor compensation, down two points but well above the percent raising selling prices. The net percent of owners reporting positive earnings trends gained three points.
Seasonally adjusted, 13 percent of the owners reported increasing employment in March and about the same number (14 percent) reported reductions. Forty-nine percent hired or tried to hire one or more workers. Eighty percent of those owners reported few or no qualified applicants for the positions they were trying to fill. Twenty-three percent had unfilled job openings, down three points but a respectable number. Over the next three to six months, 24 percent plan to create new jobs, while only 5 percent plan workforce reductions, yielding a seasonally adjusted net 9 percent of owners planning to create new jobs, a large decline from February – one Dunkelberg called “quite surprising.”
The frequency of reported capital outlays over the past six months rose three points to 66 percent of all firms – a bit better than the February numbers. Forty-seven percent spent on new equipment, 27 percent acquired vehicles, and 14 percent improved or expanded their facilities. Eight percent obtained new buildings or land for expansion and 15 percent spent money for new fixtures and furniture.
Plans to make capital expenditures over the next few months declined four points to 31 percent of all firms, perhaps due to the increase in actual outlays made in the recent months.
When asked if the current period is a good time to expand, 19 percent of the owners said yes (a point lower than in February). A net-negative 5 percent expect business conditions to improve over the next six months, down eight points from the prior month.
“The economy is doing very well but few expect it to turn in an even better performance, causing more owners to anticipate a less exuberant economy by mid year,” Dunkelberg said. This is confirmed by the decline in the percent of owners expecting higher real sales by mid-year, falling 16 points to 12 percent. It represents a rapid reversal of expectations, however, as the percent of owners expecting higher sales volumes was on a rising trend for three months ending in the strong February reading. The March reading is the lowest since March 2003, and that was an aberration.
Seasonally adjusted, a net 6 percent reported increasing inventories, a five-point gain over February’s reading. Plans to add to inventories were exceptionally strong in February and apparently owners accomplished their objectives. A net zero percent reported inventories too low (seasonally adjusted), an even leaner posture than in February.
Sales were strong throughout most of the quarter, easing a bit in March. A net 6 percent of all respondents reported higher sales in February, down a point to 5 percent in March, both historically strong. Seasonally unadjusted, 27 percent of all owners reported higher sales. Sales trends were positive and owners consider their inventories quite low. However, owner expectations about future sales trends cast a shadow over prospects for the second quarter.
Overall, plans to add to inventories remained historically solid at a net 3 percent of all firms, but well below the exceptionally strong readings from the previous six months. If sales slow dramatically in the coming months as expected, stocks currently viewed as “lean” will become excessive and inventory investment plans will deteriorate.
Even as the percent of owners raising prices fell dramatically in March, reports of positive earnings trends improved, the result of solid sales gains and a reduction in the percent reporting higher labor compensation. Nineteen percent of owners reported higher earnings compared to the previous three months and 63 percent of them cited stronger sales (up five percentage points after a three point gain in February). Eleven percent credited higher selling prices. For the 37 percent reporting lower earnings, 27 percent blamed weaker sales, 14 percent higher materials costs, 5 percent increased labor costs, 11 percent lower selling prices and 3 percent each blamed higher taxes, insurance and regulatory costs.
The number of those reporting higher compensation costs fell two points to a net 22 percent of owners, while reports of higher average selling prices deteriorated significantly, falling to a net 17 percent of small businesses. Dunkelberg says, “From a ‘macro’ perspective, this is a negative development for future profit improvement, because, on balance, fewer firms are able to pass on higher employee costs to customers.”
Regular borrowing activity was reported by 36 percent of the owners, down two points from February. The net percent reporting loans harder to get in recent months rose a point to a net 6 percent, more or less where it has been for over a decade. Only 3 percent cited the cost and availability of credit as their number one business problem. Thirty-four percent reported all their credit needs met compared to 6 percent who reported problems obtaining desired financing. The average reported rate on short-term loans fell 30 basis points to 8.0 percent from February. Since the beginning of the expansion in 2003 the lowest rate was 5.7 percent in September 2003.
“Owners appear to expect little change in the cost of credit and, even more importantly, little change in credit availability, far more important to small-business owners than the cost of credit,” the NFIB economist said.
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.
