Small business owners are optimistic on some fronts, not so on others

America’s small businesses opened 2006 on a “firm footing,” according to the National Federation of Independent Business, even though its monthly index of small-business optimism returned mixed results in January.

NFIB’s January Small-Business Optimism Index declined three-tenths of a point to 101.1 (1986=100). Overall, the survey anticipates a solid quarter of growth with tightening labor markets and little new pressure on prices.

Boosting the Optimism Index were two factors: a strengthening labor market, marked by a two-point gain in the net percent of owners who plan to increase employment, and a four-point jump among those reporting job openings, NFIB said.

“This is great news for small businesses,” NFIB Chief Economist William Dunkelberg said. “It points to solid job creation and continued downward pressure on the unemployment rate. Equally important are the data showing that there was no change in the net percent of those firms raising prices (18 percent), indicating no new pressure on prices.”

“Overall, the data point to a solid start to 2006, especially for jobs and inventory investment,” Dunkelberg added. “Capital spending appears solid, profits remain reasonably strong and credit is available to small businesses despite higher interest rates.”

In January, 10 percent of the owners reported increasing employment and 14 percent claimed workforce reductions, NFIB said. Nearly half (48 percent) hired or tried to hire one or more workers, and more than eight in 10 of those reported few or no qualified applicants for open positions, an indication of a tight labor market. 

Hiring plans overall were solid in all industry groups, with significant strength in manufacturing, construction and the wholesale trades. A net 17 percent of small employers plan to increase employment in the next three months, indicating that this year could be a fairly good period for manufacturers if the economy holds and the dollar weakens, Dunkelberg said.

Capital spending over the past six months has been firm, with 62 percent of all firms reporting outlays, a decline of only one point from December, NFIB said. Forty-six percent reported spending on new equipment, one-fourth acquired vehicles and 13 percent improved or expanded facilities. Fifteen percent spent for new fixtures and furniture; 8 percent acquired new buildings or land for expansion.

Those planning capital expenditures early in the year fell a point to 32 percent of all firms. Leading the capital spending parade were wholesale trades (49 percent), manufacturers (40 percent) and agricultural firms (37 percent).

The number of those who view the current period as a good time to expand facilities slipped a point from December to 20 percent. A net 6 percent expect business conditions to improve over the next six months, down six points. A net 24 percent expect higher real sales in the next three months, up three points from December—the force behind the need to hire additional employees and add to inventories. 

Owners planning to add to inventories remained historically high at a net 5 percent. Those in the construction industry indicate they are planning aggressive additions to inventories, with 16 percent foreseeing additions, compared to 9 percent planning reductions. Twenty-one percent of small manufacturers plan inventory additions, while 10 percent expect reductions. More than one-third (34 percent) of wholesale trades firms plan increases, and only one in five see cutbacks ahead. Retailers say they will build stocks early in the year; 31 percent plan additions, 13 percent reductions.

Seasonally adjusted, a net 3 percent reported increasing inventories (up one point from December) and a net-negative 1 percent reported inventories too low. Manufacturers’ inventory positions are viewed by owners as “fat,” with 13 percent reporting stocks “too high” and 7 percent “too low.” In construction, 8 percent reported stocks too high; 6 percent said the opposite, consistent with the softening housing market. Among the wholesale trades, nearly one-fifth (19 percent) reported stocks too high, while 7 percent said their inventories were too low. Retailers were balanced at 15 percent each.

Reports of increased sales volumes, quarter-over-quarter, fell to a net 2 percent of all firms, revealing slow activity. Unadjusted figures found that slightly more than one-fourth (26 percent) reported higher sales. Twenty-eight percent of manufacturing firms and 21 percent of construction businesses reported gains, while slightly more than one-third (34 percent) of retailers reported higher sales.

The net percent of firms reporting increases in average selling prices was unchanged at 18 percent. Wholesalers, retailers, manufacturers and construction firms most frequently reported price hikes, but more financial service firms cut selling prices than raised them.  Four-quarter averages of planned and actual price hikes remained flat.

Reports of profit gains have been stable. Of the 20 percent reporting higher earnings, more than half (55 percent) cited stronger sales, down 12 points, and 15 percent credited higher prices. Five percent said they had lower labor costs. For the 37 percent reporting lower earnings compared to the previous quarter, nearly one-third (32 percent) cited weaker sales, 19 percent blamed materials costs, and 5 percent each cited increases in the costs of labor, insurance and lower selling prices. Three percent put the onus on higher taxes and regulatory costs. 

Those borrowing regularly in January increased three points over the previous month to 37 percent. A net 5 percent, up two points, reported loans harder to get in recent months. Only 4 percent said the cost and availability of credit was their main business problem, but the net-percent paying higher rates rose five points to 26 percent.

NFIB’s Small Business Economic Trends is a monthly survey of small-business owners’ plans and opinions. NFIB is the nation’s largest small-business advocacy group. A nonprofit, nonpartisan organization that represents 600,000 members.