Small Business Optimism Up 2 Points in April
Increase Only Returns the Index to Reading from February 2011
The Index of Small Business Optimism gained 2 points to 94.5 in April, a nice gain on an absolute basis. This month's Index is the highest reading since December 2007, the peak of the last expansion. That's the good news. The bad news is that April's gain is the same as it was in February 2011 proving a year with no real gains. No surprise, since nothing much happened during that time that would make owners more optimistic about the future.
Download the Report Read the Press Release
Highlights of April's Optimism Index
- Earnings and Wages: Overall, April was a great report for profits and sales, hopefully the beginning of a solid trend. Reports of positive earnings trends improved by 11 points, settling at a negative 12 percent in April—the best reading since April 2007. The improvement was driven by sales reports, also the highest since April 2007. Not seasonally adjusted, 19 percent of small firm owners reported higher profits (up 5 points), and 37 percent reported profits falling (down 6 points). Profits are the major source of capital for financing hiring and expansion for small firms, making this a very significant and welcome development. Three percent of owners reported reduced worker compensation and 18 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation, the highest reading in 39 months and unchanged from March. A net seasonally adjusted 9 percent plan to raise compensation in the coming months also unchanged from March.
- Sales: Also a highlight of the April report, the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months gained another 3 points to 4 percent. This comes after a surprising 8 point gain in March, one of the only positive trends for that month. Nineteen (19) percent of owners still cite weak sales as their top business problem, a high reading, but far below the record 33 percent reading from December 2010. Sales are improving broadly in the small business sector, albeit not dramatically. Seasonally unadjusted, 25 percent of all owners reported higher sales, and 30 percent of owners reported lower sales (down 1 point). The net percent of owners expecting higher real sales in the months to come lost 2 points, falling to a net 6 percent of all owners (seasonally adjusted). Forty-one (41) percent of owners (no seasonally adjusted) expect improvement over the next three months (down1 point) and 19 percent expect declines (up 3 points). The improvement in sales trends is not indicative of a strong recovery but is a positive sign for small-business owners.
Job Creation: The net change in employment per firm (seasonally adjusted) came in at 0.1; this is down from March but still positive. Seasonally adjusted, 12 percent of owners surveyed added an average of 3.3 workers per firm over the past few months, and 14 percent reduced employment an average of 2.9 workers per firm. The remaining 74 percent of owners made no net change in employment. Forty-seven (47) percent of owners hired or tried to hire in the last three months. Thirty-four (34) percent of owners (or 72 percent of those trying to hire or hiring) reported few or no qualified applicants for positions. While firms have eased lay-offs, they haven’t resumed strong hiring. Unemployment claims remain high and seasonal adjustments are off track as hiring, normally done in March and April, may have occurred earlier in the year. The percent of owners reporting hard to fill job openings rose 2 points to 17 percent, one point below the January 2012 reading which is the highest we’ve reported since June 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate, making the gain in openings a welcome development. The net percent of owners planning to create new jobs is 5 percent, a 5 point increase after taking a plunge in March. Not seasonally adjusted, 18 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (unchanged from March).
- Inflation: Inflation may become a problem for the small-business community in the months to come. Twenty-six (26) percent of the NFIB owners reported raising their average selling prices in the past three months (up 1 point), and 16 percent reported price reductions (down 1 point). Seasonally adjusted, the net percent raising selling prices was 8 percent, up 2 points from March and 9 points from January. Overall, price hikes were quite pervasive as owners respond to rising input costs (labor and materials) and try to pass those costs on to customers. Twenty-five (25) percent of owners plan on raising average prices in the next few months, while 2 percent plan reductions. Seasonally adjusted, a net 23 percent plan price hikes, up 2 points from March and 9 points higher from December. Price-cutting appears to be fading and this will put upward pressure on the inflation measures.
- This month's report is based on the responses of 1,817 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of April 2012.
SUMMARY
Optimism Index
The Index of Small Business Optimism gained 2 points to 94.5 in April, a nice gain on an absolute basis. This month's Index is the highest reading since December 2007, the peak of the last expansion. That's the good news. The bad news is that April's gain is the same as it was in February 2011 proving a year with no real gains. No surprise, since nothing much happened during that time that would make owners more optimistic about the future.
Labor Markets
The net change in employment per firm seasonally adjusted was 0.1, half of the March gain, but equal to February and the third month in a row in positive territory. So, some job creation is occurring, although a lot of it will be "below the radar" of government statistics for a while. Forty-seven percent of owners hired or tried to hire in the last three months and 34 percent (72% of those trying to hire or hiring) reported few or no qualified applicants for positions. The percent of owners reporting hard to fill job openings rose 2 points to 17%, a point below January, the highest reading since June 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate and indicate that the rate would likely fall (as it did, to 8.1%), other things equal. Seasonally adjusted, the net percent of owners planning to create new jobs rose 5 percentage points, a nice gain which hopefully signals continued gains in actual employment per firm.
Capital Spending
The frequency of reported capital outlays over the past six months rose 2 points to 54%, nothing to write home about. The record low of 44 percent was reached most recently in August 2010, so spending rates are 10 points ahead of that. But in 2007, an average of 60% reported making capital outlays. So, it appears that spending remains more in "maintenance" than in "expansion" mode. The percent of owners planning capital outlays in the next three to six months gained 3 points to 25 percent, the best reading since early 2008 but well below "normal." Seven percent characterized the current period as a good time to expand facilities (seasonally adjusted), unchanged. The net percent of owners expecting better business conditions in six months was a negative 5% (3 point improvement), better, but still more owners expecting the economy to deteriorate than looking for improvement. A net 6% of all owners expect improved real sales volumes, down 2 points. Nineteen (19) percent reported "poor sales" as their top business problem, down 3 points, a good sign, but still too high. Overall, the outlook is not conducive to a lot of new spending or hiring.
Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months gained another 3 points to 4 percent, this after a surprising 8 point gain in March. This is the best reading since April 2007 and equal to the average 4% reading in 2006. Nineteen (19) percent still cite weak sales as their top business problem, historically high, but down from the record 33% reading in December 2010. Hardly a ringing endorsement of prospects for a strong recovery. Still, sales trends are looking good, maybe the improvement is "sneaking up" on small business owners. The net percent of owners expecting higher real sales lost 2 points, falling to a net 6% of all owners (seasonally adjusted). A net negative 8% of all owners reported growth in inventories (seasonally adjusted), a one point improvement. Plans to add to inventories remained at a net 0% of all firms (seasonally adjusted). So, as inventories pile up at the larger firms, small business customers remain reluctant to buy them.
Inflation
Twenty-six (26) percent of the NFIB owners reported raising their average selling prices in the past 3 months (up 1 point), and 16% reported price reductions (down 1 point). Twenty-five (25) percent plan on raising average prices in the next few months, 2% plan reductions. Price cutting appears to be fading and this will put upward pressure on the inflation measures.
Profits and Wages
Reports of positive earnings trends improved a stunning 11 points to a negative 12% in April, the best reading since April 2007. The improvement was driven by the best sales trend reports since April 2007. Profits are the major source of capital for financing hiring and expansion for small firms, making this a very welcome development. Three percent reported reduced worker compensation and 18% reported raising compensation, yielding a seasonally adjusted net 14% reporting higher worker compensation, the highest reading in 39 months and unchanged from March. A net seasonally adjusted 9% plan to raise compensation in the coming months also unchanged from March. Overall, April was a great report for profit and sales trends, hopefully the beginning of a solid trend.
Credit Markets
Financing remained low on the list of concerns for business owners. Only 3 percent cited financing as their top business problem. Ninety-two (92) percent reported that all their credit needs were met or that they were not interested in borrowing. Thirty-one (31) percent reported all credit needs met, eight percent reported that not all of their credit needs were satisfied (the record low is 4%, reached in 2000), and 49% said they did not want a loan. A net 7% reported loans "harder to get" compared to their last attempt (asked of regular borrowers only), down 4 points.
COMMENTARY
April was a good report, lots of positive changes, but unfortunately leaving us in the same place we were in February of last year. So, a year with no progress. Most encouraging were long awaited gains in positive sales and profit trends, a key ingredient to any recovery on Main Street.
First quarter GDP growth was reported at 2.2%, weaker than most observers expected but consistent with the NFIB survey numbers. The Index continues to hold at the higher values of what would be considered recession level readings. Optimism has been unable to break out into expansion mode for years, producing a few false starts with no follow-through.
There are hints in the April data that suggest that job creation and consumer spending were better than first reported by the government, so revisions may be positive. The unemployment rate decline was anticipated by the increase in reported hard-to-fill job openings and reported job creation was weaker in April than March, but positive. Job creation was weaker than the survey anticipated, but there will likely be upward revisions to the April figure.
Looking at the larger economic picture, there isn't much reason for owners to become optimistic, the stock market is good, but the economy is bifurcated. The big tech, manufacturing and agriculture firms are doing very well as profits are at a record level. But that has not been the case on Main Street. Washington clearly is not going to address our fiscal imbalances and uncertainty is huge, about taxes, health care, new rules to help unions, energy prices, regulations and the election outcome. The Federal Reserve has taken policy into territory for which no maps exist; it's not clear where its policies will take us. Developments in Europe only magnify fears that there is another "adjustment" ahead that will be as disruptive as the one we just went through. Consumer and owner confidence in government policies is at historic lows. Whatever discretionary spending consumers and owners might do is still being deferred where possible. Owners are betting their own money and are looking for better odds before putting money on the table.
Most likely, there will be little improvement on Main Street in optimism or hiring and spending this year.