Small Business Optimism Sees Record Jump

The National Federation of Independent Business (NFIB) small business economic trends is a monthly survey of small business owners’ plans and opinions.

In the biggest single-month increase in the history of the survey, the NFIB Research Foundation’s Index of Small Business Optimism jumped an unprecedented 5.3 points in April. This increase bests even the leaps of 3.8 points and 4.3 points in February and March of 1991 after the first Gulf War.

However, NFIB Chief Economist Bill Dunkelberg warned that while this increase may signal a return to more “normal” growth, it is unlikely to presage an extraordinary boom on par with that of the late 1990s. He emphasized that the February and March 2003 Index levels were unusually poor.

“The weight of war uncertainties has been lifted from the shoulders of small business owners.” Dunkelberg said. “At the same time, oil prices have gone down and severe weather conditions have abated. However, we are still in an economy that is working out the excess capacity of the ’90s boom. Manufacturers still have idle assembly lines, retailers are still drawing down inventory, and consumers still have durable goods that are new enough that they can wait for a good deal before buying replacements.”

A net 36 percent of small-business owners expected to see a better economy in six months, a 29-point improvement and the best reading since last November. Of the seasonally-adjusted net 11 percent who believe now is a good time to expand, 29 percent cited the economic climate as the reason, with 30 percent citing improved sales prospects and 30 percent citing favorable financing conditions.

The cost and availability of insurance turned in another record-breaking performance as the No. 1 problem facing small business with 24 percent of the vote. This marks the fifth consecutive month that insurance has been voted the top problem. Poor sales climbed into second place at 19 percent, edging out taxes at 18 percent.

While the outlook for sales improved in April, reports of better actual sales dropped slightly. The net percent of firms expecting higher sales in the next three to six months rose 15 points to 19 percent. However, the number of firms responding that they saw increased sales in the past month was a net -8 percent, a one-point drop.

Earnings did continue to improve, though, as businesses continue to cut costs. A net 2 percent reported higher earnings in April. It is unlikely that better earnings resulted from higher prices, since a net zero percent of firms reported hiking prices. The frequency of planned price hikes was flat at net 15 percent.

For the 25th month in the last 27, small businesses shed jobs. Nine percent of employers reported hiring an average of 2.9 employees, while 16 percent of employers went in the opposite direction, losing an average of 2.8 jobs. Thus a net average of 0.03 jobs were lost per firm. Plans for future hiring did increase somewhat, by seven points to a net eight percent of all firms. There was also a small one-point bump in the number of employers raising their employees’ compensation.

With nearly a third of small business owners citing favorable financing as the best reason to expand, credit availability is not a problem. A net 2 percent of firms reported more difficulty getting credit, the same as last month. The average interest rate on short-term loans was 6.1 percent.

Small businesses continued their long run of liquidating inventory in April, which was the 25th straight month of inventory decumulation. A seasonally adjusted net -5 percent reported bulking up their stocks. Plans to add inventories over the next few months rose a point to a net of 3 percent of firms.

Capital spending plans picked up three points to a net 30 percent of all firms. Actual outlays also rose three points to 58 percent of all firms. These increases were particularly focused in the manufacturing and construction sectors.

“Between the war, high oil prices, a severe winter, and travel scares, it’s no wonder the economy has been crawling. With most of that behind us, small business owners are ready to restart their efforts at growth. Now the question is whether consumers are ready to spend and big business is ready to reinvest its newfound profitability,” Dunkelberg concluded.

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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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