Small Business Owners See Signs of Inflation

While the Federal Reserve is focused on the problems of the large banks, small-business owners are worried about inflation, according to the National Federation of Independent Business.

In its December Small Business Economic Trends report, the percent of owners reporting higher average selling prices had fallen to a net 9 percent of all firms in September but now stands at 16 percent. Plans to raise prices rose from 21 percent in September to 26 percent of all owners in December.

The NFIB Index of Small-Business Optimism gained 0.2 points in December. The Index has lost 2.4 points since September (before base period adjustment); the index hasn’t seen readings this low since March 2003.

 Optimism Components                                Net %   Change
PLAN TO INCREASE EMPLOYMENT       11        0     
PLAN TO INCREASE CAP. OUTLAYS*    30       +3    
PLAN TO INCREASE INVENTORIES       -3          -5    
EXPECT ECONOMY TO IMPROVE         -10         0     
EXPECT HIGHER REAL SALES                 6          -2    
CURRENT INVENTORY SATISFACTION   -3      0     
CURRENT JOB OPENINGS*                       21       +2    
EXPECTED CREDIT CONDITIONS         -10         -2    
NOW A GOOD TIME TO EXPAND*         14        +1    
EARNINGS TRENDS                                  -20       +5    

*Note: These components are measured as actual percentages of all respondents and are not net percentages.  A net percentage is the percent positive minus percent negative.

“The historic relationship between inflation and the percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted viability,” said NFIB chief economist William Dunkelberg.

Unadjusted, 27 percent of small-business owners surveyed reported raising average selling prices, up three points from November, and 12 percent reported lower selling prices, unchanged. This price cutting phase has lasted well over a year.

Hiring activity is lower now than at the end of the third quarter, but in December, owners increased employment by 0.18 employees per firm, a fair performance. This is also consistent with a recent ADP National Employment Report that found small businesses accounted for an increase of 66,000 jobs in December.

NFIB’s SBET found that 21 percent (seasonally adjusted) reported unfilled job openings, up two points from November (the 34 year average is 22). Sixteen percent said the availability of qualified labor was their top business problem, up three points. 

Over the next three months, a seasonally adjusted net 11 percent of owners plan to create new jobs—unchanged from October and November and three points below September. Readings for the past three months have been a point above the 35-year average.

There was some improvement in capital spending. The frequency of capital outlays over the past six months rose six points to 62 percent of all firms, a solid increase. Forty-seven percent reported spending on new equipment (up seven points), 21 percent acquired vehicles, and 16 percent improved or expanded their facilities, according to the survey. Fourteen percent spent money for new fixtures and furniture, and 8 percent acquired new buildings or land for expansion.

Thirty percent of all firms plan to make capital expenditures over the next few months, up three points from November. Fourteen percent of the owners expressed the view that the current period is a good time to expand their business, up a point from November. A net-negative 10 percent expect business conditions to improve over the next six months.

Inventory reduction appears to be slowing. Unadjusted, 15 percent reported inventory gains and 18 percent reported reductions. A net-negative 3 percent reported stocks too low (seasonally adjusted), unchanged from November. Overall, 11 percent plan to increase stocks while 15 percent plan reductions. 

The percent of owners reporting higher sales increased four points (seasonally adjusted) to a net 1 percent (a good holiday season). Unadjusted, 25 percent of all owners reported higher sales, and 26 percent reported lower sales.   

The percent of owners expecting gains in real sales volumes was down two points, to a net 6 percent, seasonally adjusted (eight points lower than September). Owner satisfaction with inventories (a negative net 3 percent reporting stocks too low) was unchanged after heavy inventory reduction in October and November.  The net percent of owners planning to increase inventories dropped five points to a net-negative 3 percent.

Positive sales trends and price increases produced earnings gains for some small firms in December—up 5 percent over November. “Apparently demand was solid and price cutting was restrained,” Dunkelberg said.

Thirty-three percent of all retail firms reported raising average selling prices, and 11 percent reduced them.

Of the owners reporting higher earnings (18 percent, up one point), 56 percent cited stronger sales (down eight points), and 6 percent each credited lower materials costs and higher selling prices (unchanged).  For those reporting lower earnings compared to the previous three months (37 percent, down three points), 47 percent cited weaker sales (up four points), 16 percent cited higher materials costs (including energy), and 5 percent blamed higher labor costs.  Eight percent blamed lower selling prices for the decline in profits, and 3 percent cited higher insurance costs. Three percent each blamed higher financing costs and higher taxes. 

Reports of higher compensation rose three points to 24 percent of all firms, but reports of price hikes (26 percent) and a four-point improvement in sales trends overcame rising labor costs.  “Reports of profitability increased,” said Dunkelberg, “but further gains will depend on the course of the economy.”

Thirty-two percent of those surveyed reported all their credit needs met compared to 7 percent who reported problems obtaining desired financing (up three points), not as favorable a reading as in November (two points lower on balance). The net percent of owners reporting higher rates on their short-term loans was one percent (seasonally adjusted), down 14 points from September, a result of the impact of Fed rate cuts on variable priced loans (including lines of credit).

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), two points lower than November and below the average reading for the year. 

“This indicates that some owners now see credit tightening on Main Street in spite of the Fed’s expansionary policies,” Dunkelberg said. “But rates are falling and there was no change in the net percent of owners reporting credit harder to get—our basic indicator of the tightness of monetary policy.”