Washington, DC, April 12, 2006--Optimism among small-business owners took an unexpected tumble in March. The NFIB Small-Business Optimism Index lost 3.5 points, falling to 98.0 (1986=100), two points below the 30-year average. While profit trends improved, inventory investment and reported sales trends remained strong (virtually unchanged from February), labor market indicators sagged and capital spending plans faded along with weaker expectations for gains in real sales.
Declines in job creation plans and job openings accounted for 30 percent of the drop in the index, weaker real sales expectations 40 percent, and the decline in the outlook for overall business conditions contributed 20 percent of the drop.
“Although the first quarter will be very strong, something spooked small-business owners in March about the future course of the economy,” said NFIB chief economist William Dunkelberg. “The decline could indicate that owners think the economy is strong, but they don't expect it to get any better, or the economy is weak and they expect growth will slow substantially. The April survey could provide the answer.”
The percent of owners reporting higher average selling prices fell six points to a net 17 percent, good news for those worried about inflation. Twenty-two percent reported higher labor compensation, down two points but well above the percent raising selling prices. The net percent of owners reporting positive earnings trends gained three points.
Seasonally adjusted, 13 percent of the owners reported increasing employment in March and about the same number (14 percent) reported reductions. Forty-nine percent hired or tried to hire one or more workers. Eighty percent of those owners reported few or no qualified applicants for the positions they were trying to fill. Twenty-three percent had unfilled job openings, down three points but a respectable number. Over the next three to six months, 24 percent plan to create new jobs, while only 5 percent plan workforce reductions, yielding a seasonally adjusted net 9 percent of owners planning to create new jobs, a large decline from February--one Dunkelberg called “quite surprising.”
The frequency of reported capital outlays over the past six months rose three points to 66 percent of all firms--a bit better than the February numbers. Forty-seven percent spent on new equipment, 27 percent acquired vehicles, and 14 percent improved or expanded their facilities. Eight percent obtained new buildings or land for expansion and 15 percent spent money for new fixtures and furniture.
Plans to make capital expenditures over the next few months declined four points to 31 percent of all firms, perhaps due to the increase in actual outlays made in the recent months.
When asked if the current period is a good time to expand, 19 percent of the owners said yes (a point lower than in February). A net-negative 5 percent expect business conditions to improve over the next six months, down eight points from the prior month.
“The economy is doing very well but few expect it to turn in an even better performance, causing more owners to anticipate a less exuberant economy by mid year,” Dunkelberg said. This is confirmed by the decline in the percent of owners expecting higher real sales by mid-year, falling 16 points to 12 percent. It represents a rapid reversal of expectations, however, as the percent of owners expecting higher sales volumes was on a rising trend for three months ending in the strong February reading. The March reading is the lowest since March 2003, and that was considered an aberration.
Seasonally adjusted, a net 6 percent reported increasing inventories, a five-point gain over February’s reading. Plans to add to inventories were exceptionally strong in February and apparently owners accomplished their objectives.
