Small business optimism rebounds in April

Small-business optimism rebounded in April, reversing March’s slump by more than two points to 100.1 (1986=100) and returning to its historical levels, according to the monthly Small Business Economic Trends report. Researchers said the reliable entrepreneur-outlook index has hovered around the 100 mark since April 2003 when it jumped five points, signaling the beginning of an expansion

The April data revealed a solid month of activity, according to the survey by the National Federation of Small BUsiness. Profit trends and sales gains moved to historically high levels, capital spending was strong, inventories appeared lean and labor-market indicators, especially job creation plans, surged to wipe out March declines.

More than a quarter of those surveyed (28 percent) plan to create new jobs over the next three to six months, while 4 percent plan reductions, a seasonally adjusted seven point rise over March. Overall, job creation plans in all industry groups were strong, especially in manufacturing and construction. The strongest regions were Mountain, Mid-Atlantic, and South Atlantic states.

Seasonally adjusted, 11 percent reported employment increases in April, but 14 percent had reductions. Those expanding employment more than offset the impact of reductions, producing a net gain of 0.2 employees per firm. Nearly half (49 percent) hired or tried to hire one or more workers; 84 percent of those could find few or no qualified applicants for unfilled positions; 31 percent reported unfilled openings, an eight point surge from March.

With solid profits, price hikes matching compensation gains, and the business outlook optimistic, it’s a good environment for continued capital spending, NFIB report says. Those planning to make capital expenditures in the near future rose three points to 33 percent, mainly in wholesale trades, professional services and agriculture. Now is also a good time to expand facilities, said 18 percent of owners, and a net-negative 3 percent said business conditions should improve over the next six months, a two-point improvement from March and typical of this stage of an expansion. The share of owners expecting better real-sales volumes rebounded to 21 percent, a gain of nine points, which accounted for nearly 40 percent of the improvement in the Optimism Index, NFIB says.

April’s capital spending was solid. The frequency of reported capital outlays over the past six months fell four points to 62 percent of all firms. Forty-six percent reported spending on new equipment, 25 percent acquired vehicles and 16 percent improved or expanded their facilities. Seven percent acquired new buildings or land for expansion, and 16 percent bought new fixtures and furniture.

Strong sales gains produced a six-point slide from March in the percent of firms reporting higher inventory stocks, seasonally adjusted. A net-negative 1 percent reported inventories too low – very lean. In construction, 9 percent boosted inventories, 16 percent reported reductions. Twice as many owners said stocks were too high as reported inventories too low, foreshadowing a slowdown in construction and home prices. 

A quarter of manufacturers reported inventory gains; 17 percent had reductions. One-fifth plan to add and 17 percent plan reductions. Among wholesale firms, gains and reductions were equal at 20 percent each. Twenty-four percent reported stocks too high, compared to 16 sixteen percent on the low side. Additions were planned by 18 percent, while 24 percent plan reductions. In spite of improved sales, 27 percent of retailers noted increased inventories, compared to 18 percent reporting declines. Eleven percent felt stocks were too high while 9 percent found inventories were too low. Nearly one-fourth plan to increase inventories and 14 percent hope to reduce stocks.

Sales trends remained strong with a net 6 percent of firms reporting a higher volume of transactions in the first quarter compared to the fourth quarter of 2005. Seasonally unadjusted, 27 percent reported higher sales. 

Construction was weaker at 23 percent, but manufacturers gained with 37 percent reporting higher sales. Thirty percent of retailers claimed gains. Overall, sales trends were historically strong and inventories lean, a healthy condition. Plans to add to inventories were solid, but not excessive as in past months.

Earnings reports remained favorable. The number of owners reporting higher labor compensation increased five points to a net 27 percent, matched by the frequency of price hikes. Sales trends also improved, resulting in a favorable profit picture.

Of the 26 percent reporting higher earnings, nearly two-thirds cited stronger sales (a reading up 10 points since January) and 10 percent credited higher selling prices. For the 38 percent reporting lower earnings compared to the previous three months, slightly more than one-third (38 percent) cited weaker sales, 16 percent said they paid more for materials, and 5 percent each blamed higher costs for labor and insurance.

Reports of higher compensation costs rose to a net 27 percent of owners, but were matched by reports of higher-average selling prices (26 percent), leaving the profit outlook quite good with solid sales expected in the coming months.

Credit remains easily available despite government rate hikes. Only 3 percent cited the cost and availability of credit as their key business problem.