NFIB: Small Business Optimism Down 2.8 Points

The National Federation of Independent Business Index of Small Business Optimism fell 2.8 points in January to 91.8 (1986=100), the lowest reading since January 1991 (91.4).

“The Index is sending a recession signal,” said NFIB chief economist William Dunkelberg, adding, “But by comparison, this January reading is more of a recession in expectations than in hard economic data. Hiring plans and job openings are much stronger today than in 1991.”

Prior to the first Fed rate cut and recession warnings on September 18, 24 percent of owners expected the economy to improve in the coming months (net of those who were pessimistic). Twelve days after the announcement, only 5 percent expected the economy to improve. Since then, optimism among small business owners has declined after each Fed rate cut.

Employment among small business owners was down and average of 0.15 employees per firm (seasonally adjusted) in January.  Twelve percent of owners increased hiring by an average of 3.5 workers per firm, and 12 percent reduced employment an average of 4.6 workers per firm.  Forty-five percent of the owners hired or tried to hire, down 12 points from last September and two points from December. Eighty-two percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill.

Twenty-four percent (seasonally adjusted) reported unfilled job openings, up three points from December (the 34-year average is 22). Job markets are softer, but holding up, according to the report. Eleven percent of owners reported that the availability of qualified labor was their top business problem, down five points from December, consistent with a softening labor market.

Over the next three months, 18 percent plan to create new jobs (up three points), and 8 percent plan workforce reductions (down a point), yielding a seasonally adjusted net 9 percent of owners planning to create new jobs—two points below the fourth quarter average, but much stronger than the net 2 percent recorded in 1991. 

Job creation plans were positive in all industry groups, weakest in construction. Service firms reported the strongest job creation plans. The hottest regions were the West-South Central and Mid-Atlantic regions. Net job creation plans hit zero in New England, an improvement over December.

There is no evidence that cash flow problems have increased dependence on credit from the banking system. The net percent of small business owners reporting loans harder to get in recent months was unchanged at 7 percent, typical of readings for the past several years. Only 4 percent of owners cited the cost and availability of credit as their number one problem, but the percent citing inflation as their number one problem is double the level early in 2007 at 8 percent.

The net percent of owners expecting credit conditions to ease in the coming months was a seasonally-adjusted net-negative 9 percent, a point better than December, indicating that more owners see credit tightening than easing.

“With 34 percent of owners reporting all their credit needs met (up 2 percent) and only 5 percent  reporting problems obtaining desired financing (down two points), it is clear that among small business owners there are no new credit problems, and there is no credit crunch,” Dunkelberg said.

The net percent of those (seasonally adjusted) reporting higher sales in the fourth quarter compared to the third quarter lost eight points, falling to negative 7 percent. Sales were slower in the fourth quarter. Unadjusted, 23 percent of all owners reported higher sales; for 34 percent, sales were lower. The net percent of firms looking for gains in real sales volumes lost two points, falling to a net 4 percent, seasonally adjusted. By contrast, that figure was zero percent in January 1991.

Capital spending over the past six months was down; the frequency of reported capital outlays fell four points to 58 percent of all firms. Plans to make capital expenditures over the next few months fell five points to 25 percent of all firms. Nine percent of the owners expressed the view that the current period is a good time to expand facilities, down five points from December. A net negative 22 percent expect business conditions to improve over the next six months, a loss of 12 points from December. Expectations for increases in real sales gave up two points, falling to a net 4 percent of firms expecting improvements.

The inventory reductions at the end of 2007 continued into 2008, as a net negative 4 percent of those surveyed reported gains in inventory stocks (seasonally adjusted). Unadjusted, 11 percent reported gains, and 21 percent reported inventory reductions. In construction, 4 percent reported gains, and 22 percent reported reductions.

“Inventory reduction was heavy in the fourth quarter and will continue at a strong pace in construction into the first quarter of 2008,” Dunkelberg said.

Overall, 14 percent plan to increase stocks while 13 percent plan reductions, showing more of a balance outside of construction. 

The percent of owners citing inflation as their number one problem has risen to 8 percent, double last year’s numbers and the highest reading since the early 1980s. The net percent of owners reporting higher average selling prices fell from 16 percent in December to a net 8 percent in January. Plans to raise prices were unchanged holding at 26 percent of all owners in January.

“Price hikes are less frequent,” Dunkelberg said. “But there are still too many owners increasing prices to get the inflation measures into the Fed’s comfort zones.”

Unadjusted, 25 percent reported raising average selling prices, down two points, and 15 percent reported lower selling prices, up three points.  Price hikes (net of those reducing prices) were most frequent among firms in the retail and wholesale trades (not seasonally adjusted). Among finance, insurance, and real estate firms, those reporting lower prices continued to outnumber those raising prices by 19 percentage points, extending a cutting phase that has lasted well over a year. Price hikes were weakest in construction where 6 percent more owners planned price cuts than price increases.

Few price increases and weaker sales trends caused the percent of owners reporting earnings gains to decline seven points from December. Thirty-five percent of all retail firms reported raising average selling prices in contrast to 11 percent cutting prices, not enough to overcome the increased costs of compensation, energy and imports. No owners blamed poor earnings on credit market problems.

Reports of higher compensation rose one point to a net of 25 percent of all firms. Reports of price hikes faded (a net 8 percent raised prices, down eight points from December) and an eight-point decline in the percent of owners reporting higher sales in the fourth quarter all combined to deliver a bad profit quarter.