12/11/2007
CONTACT: Melissa Sharp, 202-314-2068
| Optimism Components | Net % | Change |
| Plan to increase employment | 11 | 0 |
| Plan to increase capital outlays* | 27 | 0 |
| Plan to increase inventories | 2 | +1 |
| Expect economy to improve | -10 | -8 |
| Expect higher real sales | 8 | -5 |
| Current inventory | -3 | +4 |
| Current job openings* | 19 | -3 |
| Expected credit conditions | -8 | 0 |
| Now a good time to expand* | 13 | -1 |
| Earnings trends | -25 | -7 |
| *Note: These components are measured as actual percentages of all respondents and are not net percentages. A net percentage is the percent positive minus percent negative. | ||
WASHINGTON, D.C.— Reaction by small-business owners to Federal Reserve rate cuts in September and October sent the National Federation of Independent Business Small-Business Optimism Index down 1.8 points to 94.4 in November – the lowest reading since 1993. Seventy percent of the index decline came from two index components, the outlook for real sales and the outlook for business conditions in six months. Weak earnings trends reports accounted for the balance of the decline. Inventory investment, capital spending and hiring plans all held steady.
“Things were looking good on Main Street until the Fed warned that the economy was at risk of sinking,” said NFIB Chief Economist William Dunkelberg. “That warning had credibility, and the logical response was to cut hiring, capital spending and other growth-related activities. And indeed that occurred in the last 12 days of September and continued into October and November.”
In spite of the high level of uncertainty, small business-owners reported increasing employment an average of .15 employees per firm (seasonally adjusted); this was a solid performance. Twelve percent of owners increased employment by an average of 3.4 workers per firm while 15 percent reduced employment an average of 2.4 workers per firm.
Nineteen percent (seasonally adjusted) reported unfilled job openings, down three points from October and six points from September (the 34 year average is 22). Thirteen percent of owners reported that the availability of qualified labor was their top business problem, down a point from October.
Over the next three months, 14 percent plan to hire (down one point from October and four points below September), and 10 percent plan workforce reductions (unchanged), yielding a seasonally-adjusted net 11 percent of owners planning to add new employees – unchanged from October and three points below September.
Capital spending over the last six months was down a point or more in all categories. Forty percent reported spending on new equipment, 21 percent acquired vehicles, 14 percent improved or expanded their facilities, 12 percent spent money for new fixtures and furniture and 6 percent acquired new buildings or land for expansion.
Plans to make capital expenditures over the next few months were unchanged at 27 percent of all firms. Thirteen percent of the owners expressed the view that the current period is a good time to expand facilities, down a point from October. A net-negative 10 percent expect business conditions to improve over the next six months, down eight points from October. Expectations for increases in real sales gave up five points, falling to a net 8 percent of owners anticipating improvements in real sales volumes.
“In general, small-business owner expectations that were on the rise before the Fed announcement fell after the announcement, and have drifted to lower levels since,” said Dunkelberg.
A net-negative 6 percent of owners reported gains in inventory stocks (seasonally adjusted), in November, five points lower than in October. Unadjusted, 12 percent reported gains and 18 percent reported inventory reductions. For all firms, a net-negative 3 percent reported current stocks too low (seasonally adjusted), four points better than October. Apparently the heavy reduction of stocks in November helped eliminate some of the overhang in inventories. Overall, 11 percent plan to increase stocks while 14 percent plan reductions.
In construction, 5 percent plan to add inventory; 10 percent plan reductions. “It will take a long time for the growth in fundamental demand for household creation to sop up the excess supply of homes in some regions,” Dunkelberg said. “And lower interest rates will do little to spur new construction with such an overhang of supply. The recovery of new home construction is likely to be very uneven as most of the overbuilding occurred in a few geographic areas such as California, Florida and Las Vegas, where foreclosures are very high. High foreclosure rates in Michigan and Ohio are due more to a weak economy than overbuilding.”
The net percent of owners (seasonally adjusted) reporting higher sales gained a point to a negative 3 percent (about the same for the past three months), with 25 percent of all owners reporting higher sales and 25 percent reporting lower sales (not seasonally adjusted). The net percent of owners expecting gains in real sales volumes lost five points to a net 8 percent, seasonally adjusted, five points below October and six points lower than September. Owner satisfaction with inventories (a negative net 3 percent reporting stocks too low) improved after heavy inventory reductions in October. As a result, the net percent of owners planning to increase inventories gained a point to 2 percent.
There was no significant progress on the inflation front. The net percent of owners reporting higher average selling prices only gave up a point, falling to 14 percent of all firms. Twenty-six percent of all owners plan to raise prices, up four points. Citing the historic relationship between inflation and the percent of owners reporting higher prices, Dunkelberg suggests that inflation will be showing some new, unwanted, vitality. Unadjusted, 24 percent reported raising average selling prices, down one point, and 12 percent reported lower selling prices, also down a point.
In spite of a modest improvement in sales trends, the percent of those reporting earnings gains lost seven points after several months of improvement. The decline does not appear to be a result of price cutting because the net percent of owners raising selling prices was only a point lower in November than in October (a net 14 percent raised selling prices).
Of owners reporting higher earnings (17 percent, down two points), 65 percent cited stronger sales (up seven points), and 6 percent each credited lower materials costs and higher selling prices (down five points). For those reporting lower earnings compared to the previous three months (40 percent, up four points), 43 percent cited weaker sales (down a point), 13 percent cited higher materials costs (including energy) and 8 percent each blamed higher labor costs and lower selling prices. Five percent each cited higher insurance costs and higher taxes for the adverse performance of profits. Three percent cited higher financing costs.
Reports of higher compensation fell a few points, suggesting less pressure on profits from compensation. “The increase in reports of softening profit growth could simply be a result of the fact that third quarter economic growth was exceptional, so a return to slower, more normal growth eliminated some of the profit associated with higher than normal GDP growth,” Dunkelberg said.
Credit conditions continue to look normal. Regular borrowing activity was reported by 32 percent of the owners, four points below October but typical of readings since inflation ceased being the number one business problem 15 years ago. The net percent of owners reporting loans harder to get in recent months rose one point to a net 7 percent, typical of readings for the past several years.
“There is no credit crunch on Main Street,” said Dunkelberg. “All the angst appears to be confined to Wall Street and its observers.”
NFIB's Small-Business Economic Trends is a monthly survey of small-business owners' plans and opinions. Decision makers 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 leading small-business advocacy group. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its members in Washington and all 50 state capitals.
