Small Businesses 2004 Outlook Bubbly

Toasting the New Year with spirits lifted by more than holiday champagne, the nation’s small-business owners’ outlook bubbled up 1.6 points to 106.9 in December, less than a point shy of the National Federation of Independent Business’s (NFIB) Index of Small-Business Optimism’s 1983 record and the fourth highest in the survey’s history.

“It doesn’t get much better than this,” noted NFIB Chief Economist William Dunkelberg.

Six of the key index components led the jump with substantial increases, while the three that slumped had small declines. Among the leaders, spending plans for capital equipment and hiring plans surged, both increasing enough to account for the index’s entire gain.

Upticks also appeared in job creation, inventory investment and sales expectations. Although the percent viewing the current period a good time to expand was unchanged from the 24 percent level reached in November, this component of the index is at a historically high level.

“The economy is ready to rock and roll,” Dunkelberg said, “fast at first, slower as policy adjusts to stronger private sector growth and a better balance between the sectors is reached.”

Expectations Uncorked
Capital spending plans uncorked their highest index reading in years, surging nine points to 38 percent of all firms. Adding to the merriment, reports of actual outlays in the past six months climbed three points to 63 percent. Dunkelberg said capital spending has been the missing piece in the recovery puzzle, but it now appears to have fallen into place.

Optimism also brimmed over into hiring plans, which swelled eight points to a net 20 percent, the highest reading since 2000. Hiring for the month added a seasonally adjusted .19 employees per firm, nearly double the previous month and pushing the fourth quarter “in the black” for job creation.

Small firms added a seasonally adjusted average of 0.1 employees per firm. During the past three months, 12 percent of all firms reported increasing employment an average of 4.5 workers, and 12 percent reported reducing employment by an average of 3.8 employees per firm.

“We’re finally seeing some real job generation. Firms retained their best workers and these have been ‘magnified’ through management improvements and the capital investments made in the late 1990s,” Dunkelberg said. “Productivity has grown at twice the historical rate — it won’t last forever — but it will be with us for a while longer, dampening the demand for labor. Spending will exhaust the excess labor capacity by early next year, and hiring will take off.

Not Everything’s Rosè
Still unwelcome guests at the small-business owners’ party are the lingering hangovers caused by their top problems. The cost and availability of insurance and taxes remained first and second with 28 percent and 18 percent, respectively, citing them as their number one business problem. Complaints about weak sales, eased three points to 13 percent but held its third place ranking.

Despite strong sales and high interest in re-stocking their shelves, small-business owners’ satisfaction with current inventories tumbled five points to a net minus-6 percent (the percent reporting inventories too low minus the percent reporting inventories too high).

NFIB members now report 32 consecutive months of inventory decumulation — more firms reporting inventory reduction than inventory building. The seasonally adjusted net percent of firms reporting inventory accumulation improved 3 points to -1 percent in November, still more business owners are reducing stocks than adding to them. Overall, it appears that inventory stocks are considered to be “quite lean.”

Thirsty for Sales
The number of respondents expecting real sales volume to go up in the next three to six months gained four points to a net 35 percent. This comes on the heels of a seven-point gain in October and a three-point hike in November. After hitting its best level since 2000 in November, earnings-gains reports slipped a bit but posted a historically strong reading. Now one-fifth of owners, five points fewer, claimed higher earnings. An unchanged 32 percent said earnings were weaker.

Those planning to boost inventories netted a near-record four-point increase to 9 percent, seasonally adjusted. Sales trends revealed some of the best readings in a year as the net percent of firms reporting higher quarter-to-quarter sales rose a point to 5 percent. According to the NFIB, this is a clear indication that the volume of real sales activity is moving up and owners anticipate that this will continue.

Stronger sales and some pricing power are helping the bottom line, but hiring demands will slow profit gains. Adjusted for seasonal impact, 21 percent said they increased employee compensation and 6 percent reported higher prices.

Looking ahead, owners who expect better credit conditions eased up a point to a minus-5 percent. Virtually all borrowers reported no difficulty satisfying their credit needs, but the party may be about to end for those seeking lower rates.

Nearly a quarter of those polled — 24 percent — think now is a good time to expand their facilities. While unchanged from November, this level is well ahead of March’s low 7 percent and the best reading since January 2000.

Overall Outlook
Half of those surveyed are encouraged by current economic conditions, which ticked-up nine points over December. Of those with an opposite view of future economic conditions, two thirds cited the economy as reason for their worry. The percent of owners expecting the economy to be better in six months climbed 4 points in November, rising to a seasonally adjusted 51 percent — the highest reading since the last three quarters of 1983.

“Job creation has finally gone positive, but it won’t return to the ‘binge’ rates of the late 1990s. In the short run, economic growth will have to exceed productivity gains in order to spur job creation — and this is already happening in some sectors and regions. Inventory investment plans are strong — good news for manufacturers (some of them overseas),” Dunkelberg said. “Look for fewer holiday sales — there is less on the shelves to sell and more paychecks looking for something to buy. All in all, 2004 is set to be one of the best years for the economy in the past 20 — ceteris paribus — if all things remains the same, of course.”

NFIB’s Small Business Economic Trends is a monthly survey of small-business owners’ plans and opinions. The NFIB is one of the nation’s largest small-business advocacy groups. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its 600,000 members in Washington and all 50 state capitals.

Do you have a comment or question about this article or other small business topics in general? Speak out in the Forums. Join the discussion today!
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.

Must Read

Get the Free Newsletter!

Subscribe to Daily Tech Insider for top news, trends, and analysis.