Washington, DC, September 12, 2006--The nation's normally upbeat entrepreneurs turned decidedly downbeat in August, forcing the NFIB Small-Business Optimism Index to fall more than two points to 95.9 (1986 = 100), the lowest reading recorded since March, 2003. Eight of the 10 Index components posted declines.
The two Index components that resisted the declining trend were the percent of firms with unfilled job openings and the percent of owners planning to create new jobs. Both components gained, nearing historic high levels. Twenty-five percent of owners reported one or more unfilled openings, and 17 percent plan to increase employment, net of those planning workforce reductions. There are few higher readings in the past 30 years.
One immediate result is that the percent of owners reporting higher labor compensation rose to 25 percent. The percent of owners citing the availability of qualified labor as their No. 1 business problem rose to 12 percent, the highest since 2001 (the only higher reading was 13 percent, also reached this year). Of the 55 percent of the owners who hired or tried to hire in the past few months, 84 percent reported few or no qualified applicants for their open positions. "That's a tight labor market," observed NFIB Chief Economist William Dunkelberg, who conducts the study.
The cautionary signals were more frequent, however. Regular borrowing activity was reported by 46 percent of owners, up eight points from July, and the highest level recorded since the monthly surveys were started in 1986. The previous high came in the early 1980s (data collected in quarterly surveys) when the prime rate was more than 20 percent. Owner reports of increased difficulty in arranging needed financing edged up one point to a net 8 percent, the highest point since 2000, a sign that monetary policy is having an impact.
Still, only 4 percent cited the cost and availability of credit as their main problem, far from the record 37 percent in 1982. Forty percent reported all their credit needs met, compared to 4 percent having difficulty. The net percent reporting higher rates on short-term loans rose four points to 34 percent, seasonally adjusted, the highest level since 1995. The average rate paid on short-maturity loans was 9 percent.
"Credit has become more expensive. It's significant that more owners want it and a higher percentage of owners are having a tougher time getting it," Dunkelberg said. "Owners expect the coming months to bring increased borrowing difficulties."
Recent trends in selling prices did not change from the prior the month. The percent of firms raising average selling prices only fell a point to 22 percent (net of those cutting prices). And, the percent of owners planning further price hikes only gave up a point, falling to 29 percent.
Weaker sales gains, fewer price hikes and rising labor costs combined to reduce earnings in the past three months (compared to the previous three months). A net 25 percent of all owners reported raising employee compensation compared to 22 percent who raised selling prices, a 3 point gap in passing on higher labor costs to customers. Profits were further weakened as the net percent of firms reporting gains fell a point to 2 percent.
Of the 22 percent reporting higher earnings, nearly six in 10 cited stronger sales--down a point--and 5 percent each credited higher selling prices and lower materials costs. Down a point to 34 percent were those reporting lower earnings over the past three months; 38 percent noted weaker sales--up eight points; 15 percent cited more expensive labor; 18 percent blamed costlier materials, especially energy; 12 percent blamed lower selling prices and 3 percent each said higher insurance, financing, regulatory costs and taxes were the cause.
