NFIB Small-Business Optimism Index Down
Washington, D.C., May 9, 2007--Slower growth, rising prices and weaker capital spending by small firms sent the NFIB Small-Business Optimism Index down 0.5 points in April—settling at 96.8 (1986=100).
Mirroring the performance of their larger counterparts, capital spending activity by small firms remained lethargic. The frequency of reported capital outlays over the past six months was flat at 60 percent of all firms. Forty-three percent reported spending on new equipment, 23 percent acquired vehicles, and 13 percent improved or expanded their facilities. Seven percent acquired new buildings or land for expansion and 13 percent spent money for new fixtures and furniture.
Just 29 percent of owners plan to make capital expenditures over the next few months—down 4 points from March, reflecting pessimism among of owners about the prospects for economic growth.
Twelve percent of the owners expressed the view that the current period is a good time to expand facilities, unchanged from March and a rather weak showing. A net-negative 8 percent expect business conditions to improve over the next six months, down a point from March but typical for the later stages of an expansion. A net 14 percent expect higher real sales, unchanged from March and 8 points below January.
“Overall, expectations for the economy are soft,” said NFIB Chief Economist William Dunkelberg. “Real growth will continue, but closer to 2 percent than to 3 percent.”
While growth is slower, inflation pressures are growing. The net percent of firms increasing prices has risen from 8 percent in December to 18 percent in April. “Higher labor costs are not helping the inflation situation,” said Dunkelberg.
A net 26 percent of owners reported higher labor compensation; only 18 percent passed those (and other) costs on to their customers. “The percent raising compensation dropped from the cycle high of 30 percent reached in February, and the percent raising prices has increased, lessening the impact on profits, but not helping the inflation situation,” according to Dunkelberg.
Unadjusted, 31 percent reported raising average selling prices, up 3 points, and 11 percent reported lower selling prices, unchanged. Price hikes (net of those reducing prices) were most frequent among firms in the wholesale trades, agriculture services and retail firms (not seasonally adjusted). Among finance, insurance and real estate firms, those reporting lower prices continued to outnumber those raising prices.
Nationally, the unemployment rate remains at an exceptionally low level of 4.5 percent. The low unemployment rate has affected small-business owners’ ability to find qualified employees. Twenty-six percent (seasonally adjusted) reported unfilled job openings, unchanged from March. Twelve percent of the owners reported that the availability of qualified labor was their top business problem, unchanged from February and March.
Twenty-five percent plan to create new jobs over the next three months (up 1 point), and 4 percent plan workforce reductions (down a point), yielding a seasonally adjusted net 13 percent of owners planning to create new jobs, up a point and historically strong. Fifty-three percent reported hiring or trying to hire new workers and 81 percent of those reported “few or no qualified applicants” for their positions.
Job creation plans were positive in all industry groups—strongest in construction, manufacturing and non-professional services (not seasonally adjusted). The construction strength is seasonal, while manufacturing strength is more likely a response to solid orders. The hottest regions were the Pacific states, the Mountain states and New England. Job creation plans were weakest in the Mid-Atlantic and East North-Central states.
More firms are cutting inventory stocks than raising them. A net-negative 2 percent of owners reported a gain in inventory (seasonally adjusted), 4 points lower than March and 7 points lower than February when accumulation was underway. Unadjusted, 16 percent reported gains and 17 percent reported inventory reductions. In construction, 11 percent reported gains and 16 percent reported reductions.
For all firms, a net-negative 3 percent reported stocks are too low (seasonally adjusted), a 2-point improvement from March. Seven percent of construction firms said stocks are too high, 6 percent too low. In manufacturing, 18 percent reported stocks are too high, 10 percent too low, indicating that there is more work to be done.
The percentage of owners in construction and manufacturing planning to raise prices has more than doubled from March—strong, even if a seasonal event. Thirty-one percent of construction firms plan price hikes, 4 percent plan reductions. In manufacturing, 31 percent plan to increase prices, and 3 percent plan reductions.
Twenty-six percent of all firms reported higher sales and 31 percent reported lower sales, producing a seasonally adjusted net 4 percent of all firms with higher sales in the most recent three-month period compared to the prior three months, up 4 points from March. Demand is still weak in construction, and overall sales are falling: 24 percent reported higher sales and 31 percent reported lower sales.
The net percent of owners expecting gains in real sales volumes was unchanged at a net 14 percent, seasonally adjusted, 8 points lower than January. The net percent of owners intending to increase stocks held steady at a net 3 percent seasonally adjusted, a modest but positive contribution to GDP growth.
The earnings picture is not improving. The net percent of firms reporting earnings gains fell 4 points from March levels in spite of a 4-point gain in reports of higher sales and nearly one in five owners reporting higher average selling prices. Twenty-six percent reported higher worker compensation. And energy costs are on the rise.
Of the owners reporting higher earnings (19 percent), 58 percent cited stronger sales, 5 percent lower materials costs and 11 percent credited higher selling prices. For those reporting lower earnings compared to the previous three months (43 percent), 37 percent cited weaker sales, 12 percent cited higher materials costs, 7 percent cited lower selling prices, and 5 percent each blamed higher insurance costs and tax and regulatory costs.
There is no sign that borrowing activity has picked up, even with the problems in the housing sector. Regular borrowing activity was reported by 37 percent of the owners. Among construction firms it was 10 points lower than March. The net percent of owners reporting loans harder to get in recent months fell slightly, dropping two points to a net 5 percent (6 percent said “harder,” 1 percent said “easier”), typical of recent readings.
Only 3 percent of owners cited the cost and availability of credit as their No. 1 business problem, far from the record 37 percent reached in 1982. Thirty-eight percent reported all their credit needs met compared to 4 percent who reported problems obtaining desired financing, typical of readings for the past few years. The net percent of owners reporting higher rates on their short-term loans was 16 percent (seasonally adjusted), 3 points lower than March.
The net percent of owners expecting credit conditions to ease was a seasonally adjusted net-negative 7 percent (more owners expect that it will be “harder” to arrange financing), a point better than March.