06/10/2008
CONTACT: Melissa Sharp, 202-302-9790
| Optimism Components | Net % | Change |
| Plan to increase employment | 2 | -3 |
| Plan to increase capital outlays* | 25 | -1 |
| Plan to increase inventories | -4 | -3 |
| Expect economy to improve | -12 | 0 |
| Expect higher real sales | -11 | -8 |
| Current inventory satisfaction | -3 | -2 |
| Current job openings* | 15 | -6 |
| Expected credit conditions | -10 | +1 |
| Now a good time to expand* | 4 | -2 |
| Earnings trends | -28 | 0 |
| *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. | ||
Inflation Fears Rising
WASHINGTON, D.C.—Small business owners are not optimistic about the current state of the economy. "The National Federation of Independent Business Index of Small Business Optimism fell 2.2 points to 89.3 - a recession-level reading, and the lowest index reading since 1980," said NFIB Chief Economist William Dunkelberg. "But the current low readings have not been accompanied by the declines in real spending and hiring as was the case in past recessions," he said.
There was a modest decline in employment in May (seasonally adjusted). Six percent of the owners increased employment by an average of 4.7 workers per firm, and 16 percent reduced employment an average of 2.9 workers per firm, virtually identical to the April numbers.
Forty-three percent of those surveyed hired or tried to hire (down 5 points), and 77 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. Fifteen percent (seasonally adjusted) reported unfilled job openings, down six points from April (the 34-year average is 22). "That is an indication that the unemployment rate will rise," said Dunkelberg. "Eight percent of owners reported the availability of qualified labor was their top business problem, much lower than last September (the Fed's first economic warning and rate cut) when openings stood at 25 percent of all firms, and 17 percent reported the availability of qualified workers was their top business problem."
Over the next three months, 16 percent plan to create new jobs (down three points), and 8 percent plan workforce reductions (up two points), yielding a seasonally adjusted net 2 percent of owners planning to create new jobs - down three points from April. Not seasonally adjusted, job creation plans were positive in all industry groups.
A slowing economy is not deterring firms from raising prices. The net percent of owners reporting higher average selling prices rose three points to a net 23 percent in May. An increasing number of owners worried about inflation "through the back door", with the percent of owners citing inflation as their No.1 problem up three points to 17 percent, the highest reading since 1982. Plans to raise prices rose one point to a net 32 percent of all owners (up 11 points from last September) - not good news for those concerned about inflation.
Unadjusted, 37 percent reported raising average selling prices, up two points, and 13 percent reported lower selling prices, unchanged from April. Price hikes (net of those reducing prices) continued to be most frequent among firms in the wholesale and retail trades (not seasonally adjusted).
After posting a five-point improvement in April, the net percent of owners reporting earnings improvements was unchanged in May and cyclically low. Seasonally adjusted, those reporting declining earnings outnumbered those with gains by 28 percentage points. Widespread price increases were unable to counter the pressures from backdoor inflation (now reported by the highest percent of owners since 1982) and weak sales. The percent of all firms reporting higher employee compensation also fell five points to a net 15 percent of all firms, positive for earnings but not enough of a cost reduction to change profit trends.
Of the owners reporting higher earnings (16 percent, unchanged), 50 percent cited stronger sales (down six points), and 6 percent each credited lower labor costs and materials costs, higher selling prices and reduced taxes or regulatory costs. For those reporting lower earnings compared to the previous three months (48 percent, down two points), 40 percent cited weaker sales (down two points), 25 percent cited higher materials costs (read "energy") and 4 percent blamed higher labor costs. Six percent blamed lower selling prices, and 4 percent cited higher taxes for the adverse performance of profits. Two percent named higher insurance costs.
The frequency of reported capital outlays over the past six months drifted a bit lower to 54 percent of all firms (down two points). Spending activity has declined six points since last September. Forty percent reported spending on new equipment (up two points), 19 percent acquired vehicles (down five points), and 11 percent improved or expanded their facilities (down two points). Twelve percent spent money for new fixtures and furniture (down one point), and 5 percent acquired new buildings or land for expansion (down one point).
Plans to make capital expenditures over the next few months fell one point to 25 percent, not particularly strong. Four percent characterized the current period is a good time to expand facilities, down two points from April and historically low. Last September, 14 percent felt it was a good time to expand operations. A net-negative 12 percent expect business conditions to improve over the next six months, unchanged from April but 14 points below last September's reading. Expectations for increases in real sales fell eight points to a net-negative 11 percent expecting improvements (25 points below September readings) - all in all, not a very positive environment for capital spending, according to Dunkelberg.
A net-negative 12 percent of owners reported gains in inventory stocks, two points worse than April and five points worse than March. Inventory reductions have continued into 2008, and at a somewhat faster pace. Unadjusted, 14 percent reported gains and 22 percent reported reductions. A net-negative 3 percent reported stocks too low (seasonally adjusted), down two points from April but still a lean reading historically.
The net percent of owners expecting gains in real sales volumes fell eight points to a net-negative 11 points, seasonally adjusted, 25 points below last September's reading. Because of the pessimistic outlook for real sales volumes, more firms plan to continue to cut stocks rather than add to them. A net-negative 4 percent of all firms, seasonally adjusted, plan to add to stocks, down three points from April. Seasonally unadjusted, 11 percent plan to add to stocks (down three points) while 15 percent will reduce stocks (up two points).
More firms are reporting deteriorating sales trends than sales gains, quarter over quarter. The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months was down two points, falling to a negative 11 percent (seven points worse than September). Unadjusted, 23 percent of all owners reported higher sales, and 38 percent reported sales lower. "Clearly the economy is weak compared to six months ago," said Dunkelberg.
For the ninth straight month since the Fed declared the existence of a credit crunch, no evidence of credit problems has appeared on Main Street. Regular borrowing activity was reported by 35 percent of the owners, down one point from April and typical of readings for the past 15 years. "There is no evidence that there are cash flow problems that have increased dependence on credit from the banking system," said Dunkelberg.
The net percent of owners reporting loans harder to get in recent months fell one point to a net 8 percent (9 percent said harder, 1 percent said easier). The average reading since September's Fed rate hike is 7 percent. Only 3 percent of the owners cited the cost and availability of credit as their No.1 business problem (unchanged), far from the record 37 percent reached in 1982 and unchanged for years (however 17 percent cited inflation as their No.1 problem in May, 13 points above the level in September 2007). Thirty-four percent reported all their borrowing needs met (unchanged), compared to 7 percent who reported problems obtaining desired financing (up two points), no real change.
The net percent of owners reporting higher rates on their short-term loans was negative 15 percent (seasonally adjusted), 30 points lower than last September, a result of the impact of Fed rate cuts on variable rate loans (including lines of credit). "Clearly lower rates are not stimulating capital spending which has drifted lower as the Fed has cut rates," Dunkelberg said. "Unfortunately, the rate paid to savers has also declined as the Fed cut rates. Ordinary savers are being forced to help out the big Wall Street banks by Fed policy."
The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net-negative 10 percent (more owners expect that it will be harder to arrange financing), one point better than April. The average reading of owners expecting credit conditions to ease in the coming months was a net negative 8 percent in 2007.
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 largest 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.
