04/ 02/ 2007
by Bill Dunkelberg
NFIB's small-business economic trends reports found the U.S. economy strong at the end of last year. And while early 2007 readings were slightly weaker, they still predicted growth. Even better news is that small-business owners remain quite optimistic about the economy, especially for this stage in the expansion period we're currently experiencing. Twenty-two percent of small-business owners surveyed expect the economy to be "better" six months from now, while only 16 percent expect the economy to weaken by mid year. At this point in a typical expansion, there are usually more owners who think there can't be room for improvement than there are those who expect even more growth. Seasonally adjusted, 17 percent of all owners think now is a good time to expand—another good sign. The fact that 30 percent are planning capital outlays in the next three to six months supports this positive view of the economy. Here is a look at other factors influencing small-business growth:
Labor markets: The January 2007 survey that forecasted a 2 percent growth for the first quarter was enough to keep the labor markets tight. A net 17 percent of all owners plan to increase employment at their companies, one of the strongest readings in the 30-year history of the NFIB surveys. (Remember, "net percent" is the percentage who plan to increase minus the percentage planning to reduce employment.) Twenty-six percent of all owners surveyed have job openings they can't fill—but not for a lack of trying. Fifty percent try to hire or hire every month. But about 80 percent of these owners report few or no qualified applicants for their open positions.
Inflation: From the Federal Reserve's point of view, the inflation outlook has improved, with the net percent of firms raising prices falling from 26 percent in April 2006 to 12 percent in January 2007. While it's a clear easing of inflationary pressures, it's not enough to get the core inflation rate down into the Fed's target range of 1 percent to 2 percent. In 2003, for example, the consumer price index inflation rate was around 2 percent, and the net percent of firms raising prices averaged 3 percent that year—quite a bit lower than the 12 percent reading in January. The bad news is that the inability to raise prices impacts earnings, which deteriorated early in the year. While only a net 12 percent of businesses raised prices, 26 percent reported higher labor compensation—not a recipe for earnings growth.
Economy overall: Small-business owners monitor all economic conditions to gauge their business' future success. The good news is that other areas of the economy are doing very well. The stock market is at record levels, interest rates are still historically low, and the population continues to grow (primarily from immigration). Japan and Western Europe face prolonged declines in their populations, which isn't good for economic growth (fewer people to buy houses, cars, etc.). Japan has finally started to grow, and China, India and now Russia (on the strength of its energy revenues) are growing at a fast pace, too (though it's easier to log good growth percentages when you start at lower levels). Foreign growth will help the U.S. economy since our exports increase when our trading partners do well, creating more jobs in this country.
Capital markets remain friendly as well. There has been no evidence that credit has become less available, although the price for credit is much higher than when the Federal Funds target was 1 percent instead of the current 5.25 percent. All in all, 2007 should deliver another year in the expansion mode—even if Congress gets a bit carried away with its new politics.
