Small-Business Optimism Hits Highest Mark of 2003

The National Federation of Independent Business (NFIB) Research Foundation’s Index of Small Business Optimism climbed 1.6 points in June, the highest reading this year. Small-business owners expressed strong optimism last month that the economy would improve, that their own sales would improve, and that now is a good time to expand.

This good news is tempered by the fact that far fewer of these small-business owners show equal enthusiasm for the spending necessary to make strong economic growth a reality. Plans to increase employment, capital spending, and inventories were tepid at best.

“The proportion of small-business owners expecting improvement in the economy has reached record levels for our monthly surveys, started in 1986 and is exhibiting a pattern that has reliably preceded every expansion period since 1973,” said William Dunkelberg, NFIB’s chief economist and author of the survey.

“Every economic episode has its unique characteristics, but this indicator appears to be quite reliable,” Dunkelberg added. “If so, the economy is about to pick up its growth pace, an event that will be welcomed by all. The tax cuts, the Fed action, and the stock market are all fueling optimism, but this has yet to be translated into increased spending and hiring.”

The percent of small-business owners expecting the economy to be better in six months jumped by 9 points in June to a net 48 percent of all owners, tying the highest reading since the monthly surveys were started in 1986. Unadjusted, 52 percent expect the economy to strengthen over the next six months (up 5 points) and 5 percent expect the economy to weaken (down 3 points).

“This Index component has reliably anticipated every period of growth since the 1974-1975 recession period. It is certainly sending a strong signal now,” Dunkelberg said.

Rising insurance costs remained at the top of the problem list for small-business owners. The cost and availability of insurance received 28 percent of the votes in the balloting for the single most important business problem, one of the strongest showings for any problem since labor shortages in 2000 and inflation and the cost and availability of credit in the early 1980s.

Firms continued to report falling sales in June, with 27 percent reporting more sales and 30 percent reporting fewer. This brings the seasonally adjusted net-sales figure down a point. Continuing the theme of optimism, however, the net percent of firms expecting their sales to increase jumped six points to 24 percent of small businesses — the best figure in a year.

In addition to moving fewer units, more small firms cut their sales price per unit. The percent of firms reporting higher prices fell to a net 1 percent of all firms seasonally adjusted. Unadjusted, 16 percent reported higher prices and 16 percent reported lower prices.

Small businesses continue working to master their costs, and are being modestly rewarded at the bottom line. An unadjusted 21 percent reported higher earnings, and 41 reported earnings were weaker.

The jobs picture continues to lag other indicators, as small firms went their 27th month in the last 29 reducing the workforce. On average, just under a quarter of an employee was lost per firm. However, the number of firms claiming a hard-to-fill job opening rose a point, indicating that the shrinking of the workforce may slow. Employee compensation pressures eased, with a net 16 percent of employers raising average worker compensation, one of the lowest readings in a decade.

Credit markets continued to be friendly to small businesses, with only a net 5 percent reporting more difficulty borrowing. Only 2 percent said that credit was their most important problem. Credit was also cheap, as the average interest rate paid fell to six percent, the lowest since NFIB added this question to the survey in 1980.

Overall, it appears that inventory is in good shape. Firms continued to liquidate stocks. The seasonally adjusted net percent of firms reporting inventory accumulation eased 3 points to -6 percent in June, the 27th consecutive month in which more firms reported inventory reductions than reported gains. Plans to add to inventories remained strong.

Reports of actual capital outlays eased 3 points, and plans to increase capital spending in the future were flat at 28 percent of firms. No strength here.

“With the most recent Fed cut, the economy is packed with stimulus, and the second quarter will be a bit better than the first, especially because the weather isn’t a drag,” Dunkelberg said. “In the near term, though, the prospects for improved job creation and capital spending are a bit dim. Owners are apparently going to require a lot of convincing before they add new labor and capital capacity,”

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Small Business Computing Staff
Small Business Computing Staff
Small Business Computing addresses the technology needs of small businesses, which are defined as businesses with fewer than 500 employees and/or less than $7 million in annual sales.

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