Survey: Small-Business Owners Worry about Economy

Small-business owners are showing signs of doubt about future economic growth. The National Federation of Independent Business Small-Business Optimism Index lost 1.2 points in June, falling to 96.0 (1986=100). The Index has now been below its historical average (100.2) for 15 of the past 16 months and below 100 during all of 2007.

 “Small-business owners have seen little to encourage them about growth,” said NFIB chief economist William Dunkelberg, “but there are few signs that the economy is ready to slip into an actual recession.”

Hiring plans among small firms faded in June, but job openings are historically high and unemployment remains low, NFIB said. Seasonally adjusted, job growth was flat compared to May, with about as many firms increasing total employment as reducing it, 12 percent each. Unadjusted, 17 percent increased employment, and 10 percent reduced the size of their workforce. 

Twenty-six percent, seasonally adjusted, reported unfilled job openings, up two points from June, and historically very strong. Thirteen percent of the owners said the availability of qualified labor was their top business problem, a point higher than last month. 

Over the next three months, a seasonally adjusted net 12 percent of owners planned to create new jobs – strong compared to readings during the 1980s expansion, but low compared to recent experience. Twenty percent planned to create new jobs, down five points, and 7 percent plan workforce reductions, up one point. Fifty-four percent reported hiring or trying to hire new workers, and 83 percent of those reported few or no qualified applicants for their positions.

“Capital spending plans remained weak,” Dunkelberg said. “Small-business owners are plodding along. There is not enough spending to lift productivity significantly.”

The frequency of reported capital outlays over the past six months fell five points to 55 percent of all firms. Plans to make capital expenditures over the next few months fell a point to 28 percent, disappointing but consistent with the views of owners about the prospects for more economic growth.

Thirteen percent expressed the view that the current period is a good time to expand facilities, up a point but a rather weak showing. A net-negative 5 percent expect business conditions to improve over the next six months, down two points but typical of readings on this component at later stages of an expansion. A net 11 percent expect higher real sales, down five points from May. Overall, expectations for economic growth are soft.

“GDP growth will continue, but it will be closer to two percent real growth than three percent,” Dunkelberg said.

A net-negative 5 percent of owners reported a gain in inventory stocks, seasonally adjusted, down seven points from May. Unadjusted, 16 percent reported gains, and 17 percent reported inventory reductions. A net-negative 7 percent reported stocks too low, seasonally adjusted, a one point drop from May.

Twenty-seven percent of owners reported higher sales, and 28 percent reported lower sales, for a seasonally adjusted net-negative 4 percent of all firms with higher sales. The percent of owners reporting improved sales trends has lost seven points in two months. The net percent of owners expecting gains in real sales volumes fell five points to a net 11 percent, seasonally adjusted, eleven points lower than at the beginning of the year. Expecting little improvement in sales, owners plan, on balance, to reduce inventory stocks.   

The net percent of owners reporting higher average selling prices, seasonally adjusted, rose to 19 percent in June, three points higher than in May. Unadjusted, 31 percent reported raising average selling prices, up two points, and 13 percent reported lower selling prices, up one point.

Reports of earnings gains faded by three points from May, still not as low as early in the year, but headed the wrong way. Labor costs (the largest cost of doing business for most small firms) continued to pressure earnings, with 26 percent reporting higher employee compensation, down three points from May but high compared to readings as low as 15 percent in 2003. 

Twenty percent of the owners reporting higher earnings, 55 percent of those cited stronger sales (down ten points), 10 percent credited higher selling prices with 5 percent each cited lower labor and materials costs. Thirty-eight percent reporting lower earnings compared to the previous three months; 42 percent cited weaker sales, 13 percent cited higher materials costs (energy), 8 percent each cited lower selling prices and higher labor costs, 5 percent blamed higher insurance costs, and 2 percent higher regulatory costs.

“With better than one-in-four owners reporting higher compensation, labor costs will be a continuing source of pressure on profits,” said Dunkelberg.

Capital markets remain friendly. Regular borrowing activity was reported by 35 percent of owners, down three points. The net percent of owners reporting loans harder to get in recent months fell one point to a net 5 percent, typical of recent readings. 

Only 3 percent of owners cited the cost and availability of credit as their No. 1 business problem, far from the record 37 percent reached in 1982. Thirty-six percent reported all their credit needs met compared to 4 percent who reported problems obtaining desired financing, typical of readings for the past few years.