NFIB survey suggests a decline in small business optimism

The National Federation of Independent Businesses’ “Small-Business Optimism Index” slipped again in May, down 1.6 points to 98.5 (1986=100). That suggested, said an NFIB recent release, that the decline in March may not have been a fluke, but the beginning of “an oscillation in the outlook that is signaling a peak for economic growth.”

“It’s hard to beat the first-quarter performance, so a ‘slowdown’ is definitely going to happen,” said William Dunkelberg, NFIB chief economist. “The only question is how far and how fast.” Triggering the slide were a reduction in job openings, capital spending plans, and an increase in the percent of small-business owners who believe business conditions will worsen in six months than they are now.

Economic activity was strong in May, Dunkelberg said, noting that reports of higher sales volumes rose and the share of owners expecting higher volumes was unchanged. Additionally, there were few signs of problems arranging financing and inflation news, “while not improving, was somewhat muted.”

One-fourth of small-business owners responding to the survey had unfilled job openings, a six-point retreat from April’s near-record level. More than half of all owners (56 percent) hired or tried to hire one or more workers, up eight points from April levels. However, four-fifths (84 percent) of those couldn’t find qualified applicants.

Looking ahead, 26 percent plan to create jobs in the next three to six months, versus 5 percent planning cutbacks. While government payroll statistics forecast a soft job market, NFIB’s data suggests the opposite, with strong reports of unfilled job openings and rising complaints about a shortage of qualified workers.

However, prospects for increased capital spending over the next few months faded. Those with spending plans fell five points to 28 percent.

Virtually unchanged is the frequency of intended capital outlays over the past six months (62 percent); new equipment (46 percent); acquired vehicles (24 percent), and improved or expanded facilities (14 percent). A similar share (14 percent) picked up new fixtures and furniture. Five percent bought new buildings or land for expansion. Eighteen percent expressed the view that the current period is good for expanding facilities, unchanged from April.

Those expecting the economy to slow exceeded those expecting business conditions to improve over the next six months by 10 percentage points, a seven-point deterioration from April. “Five percent growth in a quarter is hard to improve upon,” Dunkelberg said.

One-fifth expect improvement in real sales volumes, which are unchanged. Profits trends improved and reports of sales gains increased, signs that the past few months have been very good for small firms.

Strong May sales gains drew down small firms’ inventories. More reported declines than gains.The number of those reporting inventories too low was unchanged. A net 11 percent claimed higher sales in the most recent three-month period compared to the prior three months. Seasonally unadjusted, one-third reported higher sales, a jump of six points. Expected real-sales volumes were unchanged and with the draw down of stocks over the past few months, plans to add to inventories gained a point over April levels.

While those monitoring the nation’s interest rates may rejoice upon hearing that the net percent of small firms raising average selling prices fell two points to 24 percent in May, they should heed reports that the level of firms raising prices is going in the other direction. Unadjusted, 36 percent reported raising average selling prices, up one point from April’s reading. Eleven percent reported reductions.

Solid sales gains and widespread price hikes drove earnings trends higher in May. The frequency of reported higher selling prices matched the frequency of compensation increases at 24 percent each.

Of the 22 percent reporting higher earnings, 64 percent cited stronger sales and 7 percent credited higher selling prices. Three percent noted lower labor costs, and two percent cited lower materials costs. For the 37 percent reporting lower earnings, compared to the previous three months, one fourth cited weaker sales (down nine points), 19 percent blamed higher materials costs, 8 percent put the onus on lower selling prices, 6 percent each pointed to higher labor costs or insurance fees and 5 percent blamed higher taxes and regulatory costs.

Reports of increased labor compensation fell two points to a net 24 percent but were balanced by an equal percentage of firms raising selling prices. If firms can raise prices to match increased compensation costs, profits should remain solid.