The National Federation of Independent Business Small Business Economic Trends Optimism Index fell 1.1 points to 96.2 in October (1986=100), continuing the decline that followed the Federal Reserve interest rate cut in September.
Optimism Components Net % Change
PLAN TO INCREASE EMPLOYMENT 11 -3
PLAN TO INCREASE CAP. OUTLAYS* 27 -2
PLAN TO INCREASE INVENTORIES 1 +1
EXPECT ECONOMY TO IMPROVE -2 -4
EXPECT HIGHER REAL SALES 13 -1
CURRENT INVENTORY SATISFACTION -7 -4
CURRENT JOB OPENINGS* 22 -3
EXPECTED CREDIT CONDITIONS -8 +2
NOW A GOOD TIME TO EXPAND* 14 0
EARNINGS TRENDS -18 +2
*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.
“Things were looking good until Sept. 18 when the Fed warned that the economy was sinking,” said NFIB chief economist William Dunkelberg. “The logical response of small-business owners was to cut hiring, capital spending, and other growth-related activities.”
Owners did try to hire and fill needed positions in October, but with little success. Fourteen percent reported increasing employment an average of 2.9 workers per firm compared to 11 percent who reported workforce reductions averaging 4.2 workers (seasonally adjusted), an average decrease of about 0.1 employees per firm. In construction, 11 percent increased the size of their workforce, and 16 percent cut employment (not seasonally adjusted).
Twenty-two percent (seasonally adjusted) reported unfilled job openings, down three points from September (the 34-year average is 22). “Jobs disappear when owners don’t expect sales to grow,” Dunkelberg said. Fourteen percent of the owners reported that the availability of qualified labor was their top business problem, down three points from September.
Over the next three months, 15 percent plan to create new jobs (down three points), and 10 percent plan workforce reductions (up one point), yielding a seasonally adjusted net 11 percent of owners planning to create new jobs—down three points. “When the official watchers of the economy warn of recession risk, hiring and spending are scaled back,” the economist said. Fifty-four percent reported hiring or trying to hire new workers (down three points), 84 percent reported “few or no qualified applicants” for those positions.
Job creation plans were positive in all industry groups with the exception of financial services and agriculture, where declines in jobs are expected at this time of year. Professional service firms had the strongest job creation plans. The hottest areas were the West, South, Central, and Mountain regions. Net job creation plans were flat in the Pacific states and negative in the Mid Atlantic states.
Sixty percent of all firms reported capital outlays during the last six months, an increase over September readings. Forty-three percent reported spending on new equipment, 22 percent bought vehicles, 15 percent improved or expanded their facilities, 14 percent spent money for new fixtures and furniture, and 7 percent acquired new buildings or land for expansion.
However, plans to make capital expenditures over the next few months lost two points, falling to 27 percent of all firms. Fourteen percent of the owners expressed the view that the current period is a good time to expand facilities, unchanged from September (but lower than before the interest rate cut). A net-negative 2 percent expect business conditions to improve over the next six months, down four points from the full month of September but about the same as the post-September 18 reading.
A net-negative 1 percent of owners reported gains in inventory stocks (seasonally adjusted), a point higher than September. Unadjusted, 15 percent had gains and 15 percent reported inventory reductions. In construction, 10 percent reported gains and 15 percent reported reductions, a continuation of the heavy inventory decrease reported last month.
For all firms, a net-negative 7 percent reported stocks too low (seasonally adjusted), four points worse than September. Dunkelberg points out that if the economy is going to weaken, current stocks suddenly look excessive. In construction, 10 percent reported stocks too high, 6 percent too low. Only 9 percent plan to increase stocks while 17 percent will reduce inventory. Thirteen percent reported lower selling prices; 23 percent raised average selling prices.
There are signs of some firming of demand in the construction industry. In July of 2006, a net 40 percent of the construction firms were raising prices, compared to a net 1 percent reporting higher prices in September 2007. Now, more firms are raising prices, indicating stronger support from non-residential construction and home additions and repairs.
Twenty-seven percent of all owners reported higher sales, and 27 percent 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. Sales were unchanged and indicative of lackluster growth. In construction, 30 percent reported higher sales and 26 percent lower sales.
The net percent of owners expecting gains in real sales volumes was up one point to a net 13 percent, seasonally adjusted, but still seven points lower than at the beginning of the year. Owner satisfaction with inventories (a negative net 7 percent reporting stocks too low) was worse than September, but plans to increase stocks improved a point, and were five points better than in August.
“The Fed may be preoccupied with recession but small-business owners’ reports of price hikes suggest that inflation can’t be dismissed,” said Dunkelberg. “The historic relationship between inflation and the percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted, vitality.”
The net percent of owners reporting higher average selling prices rose six points to 15 percent of all firms. Plans to raise prices also gained a point to 22 percent of all owners. Unadjusted, 25 percent reported raising average selling prices, up four points, and 13 percent reported lower selling prices, unchanged. Price hikes (net of those reducing prices) were most frequent among firms in the wholesale trades and in agriculture (not seasonally adjusted). Among finance, insurance and real estate firms, those reporting lower prices continued to outnumber those raising prices by 20 points. Price increases were weakest in manufacturing and construction.
Reports of earnings gains rose two points from September and four points over August, aided by stability in sales trends, a strong surge in price hikes, and fewer reports of compensation gains. Of the owners reporting higher earnings (19 percent, up two points), 58 percent cited stronger sales (down one point), 11 percent credited higher selling prices, and 6 percent each reported lower labor costs and lower materials costs. For those reporting lower earnings compared to the previous three months (36 percent, up five points), 44 percent cited weaker sales (up two points), 14 percent cited higher materials costs (including energy), 8 percent each blamed higher labor costs and lower selling prices, and 3 percent cited higher insurance costs for the adverse performance of profits.
On Main Street, credit conditions continue to look normal. Regular borrowing activity was reported by 36 percent of the owners, unchanged and typical of readings for the past 15 years. The net percent of owners reporting loans harder to get in recent months fell to a net 6 percent (7 percent said “harder,” one percent said “easier”), typical of readings for the past several years.
“Clearly we are not experiencing a credit crunch by any standard,” said Dunkelberg.