Small-Business Optimism Index Gains a Point

The National Federation of Independent Business Small-Business Optimism Index rose one point in September to 97.3 (1986=100). The Index has been below its historical average for 17 of the past 18 months, and has been below 100 all year, reflecting the sub-par growth of the economy, NFIB said.

Small-business owners tried to fill jobs in September, but with little success. Thirteen percent of those responding to the monthly NFIB Small-Business Economic Trends survey increased employment an average of 3.7 workers per firm, but 14 percent had reductions of three workers. Three-fourths of the reported payroll jobs were in medical care, education and government, industries not dominated by small firms, where hiring was weak.

A seasonally adjusted 25 percent reported unfilled job openings, unchanged from August, keeping the unemployment rate low.

Eighteen percent of firms plan to create new jobs over the next three months, up a point over August numbers, while 9 percent plan reductions, up a point. This produced a seasonally adjusted net 14 percent of owners who plan to create new jobs, down a point from August but very solid, NFIB said. Fifty-seven percent said they hired or tried to hire new workers, up four points from August, but 84 percent of those trying to hire reported few or no qualified applicants.

Capital spending finally showed signs of life in September. The frequency of reported capital outlays over the past six months rose two points to 60 percent of all firms, according to the survey. Forty-five percent bought new equipment, and 23 percent acquired vehicles. Seventeen percent improved or expanded facilities, 15 percent bought new fixtures and furniture, and 6 percent acquired new buildings or land for expansion.

Twenty-nine percent of all firms plan to make capital expenditures over the next few months—up two points. Fourteen percent said this is a good time to expand facilities, up two points from August. A net 2 percent expect business conditions to improve over the next six months, up two points.

“The NFIB indicators suggest that owners have seen the bottom and are expecting the economy to gradually improve in the months ahead,” said NFIB chief economist William Dunkelberg.

An unadjusted 29 percent of those responding had higher sales, and 27 percent reported lower sales. This produced a seasonally-adjusted net-negative 4 percent of all firms with higher sales in the most recent three-month period compared to the prior three months – unchanged from August and seasonally weak. The net percent of owners expecting gains in real sales volumes was up a point to a net 14 percent seasonally adjusted, eight points lower than at the beginning of 2007.

The number of firms raising average selling prices dropped four points to a net 9 percent, the lowest reading since last December. Unadjusted, 21 percent reported raising average selling prices, down two points. Thirteen percent said they reduced prices, up two points. However, this will put profits under more pressure as rising labor costs are not being passed on to customers.

Reports of earnings gains rose two points from August. “The number of firms raising prices has dropped 10 points in the last two months, and the net percent of owners raising worker compensation has remained historically high, up four points to a net 27 percent,” said Dunkelberg. “Since labor costs are the largest business cost for most firms and fewer firms are passing these costs on to customers, the improvement in profit trends is surprising.”

Of the 17 percent of owners reporting higher earnings 59 percent cited stronger sales, down a point, and 6 percent each reported lower labor costs, lower materials costs and higher selling prices. Of the 31 percent reporting lower earnings compared to the previous three months, 42 percent cited weaker sales – down two points, 16 percent each cited higher materials costs including energy, and 10 percent blamed higher labor costs. Six percent cited higher insurance costs, and 3 percent blamed lower selling prices for the adverse performance of profits. “Rising labor costs and the apparent increasing inability to pass costs on through higher selling prices will continue to threaten profits,” Dunkelberg said.

The Fed rate cut lowered the prime rate of interest for some small-business owners. Regular borrowing activity was reported by 36 percent of the owners, up one point and typical of readings for the past 15 years. The net percent of owners reporting loans harder to get in recent months has risen several points to a net 9 percent (9 percent said harder, 0 percent said easier), the highest reading since 1993, although figures of 7 or 8 percent are common throughout the decade.

Just 3 percent of those surveyed cited the cost and availability of credit as their number one business problem. Thirty-seven percent reported all their credit needs met. Five percent reported problems obtaining desired financing, typical of readings for the past few years. The net percent of owners reporting higher rates on their short-term loans was 15 percent, seasonally adjusted, up a point from August and three points above July (rates are not falling). The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net-negative 10 percent (more owners expect that it will be harder to arrange financing).

“That is four points more negative than July,” said Dunkelberg. “This is the most concerned reading this year and the highest since June of 1993, although readings of negative 7 and 8 percent were fairly common. Overall, credit availability is still not a problem for Main Street.”

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