Survey: Small Business Optimism Declines

A sharp drop in job creation plans, coupled with a decline in the net percent of small-business owners expecting the economy to improve, sent the National Federation of Independent Business Research Foundation Index of Small-Business Optimism back to mid-summer levels – down 3.2 points to 96.5 (1986=100).

Over the next three months, 14 percent of small businesses surveyed plan to create new jobs (down four points), and 9 percent plan workforce reductions (up three points), for a seasonally adjusted net 10 percent of owners planning to create new jobs, a remarkable decline from the near record high reading in October.

“Labor markets ended the year with strength,” said NFIB chief economist William Dunkelberg. “But it appears the first quarter performance may not be as strong.”

Nineteen percent (seasonally adjusted) reported unfilled job openings, down three points from November and eight points from October, a clear signal that the unemployment rate will start to rise in the first quarter. Ten percent of the owners reported that the availability of qualified labor was their top business problem, down two points from November and five points from October, indicating that labor market conditions may be easing.

Seasonally adjusted, 16 percent of the small-business owners surveyed reported increasing employment an average of 3 workers per firm. Thirteen percent had workforce reductions averaging 2.4 employees, a solid performance for December, adding an average of 0.1 new workers per firm. Forty-nine percent hired or tried to hire one or more workers, 82 percent of these owners reported few or no qualified applicants for the positions they were trying to fill.

Seventeen percent of the owners expressed the view that the current period is a good time to expand facilities, unchanged from November. A net negative 4 percent expect business conditions to improve over the next six months, a fifteen-point decline from November but higher than five of the monthly readings in 2006 and typical of readings later in an expansion. Owners expecting higher real sales were down three points to 18 percent–the second highest reading in the last six months. “Not as optimistic as in the first half of the year, but a solid reading,” Dunkelberg said. 

Twenty-seven percent reported higher sales and 26 percent reported lower sales, producing a seasonally adjusted net 3 percent of all firms with higher sales in the most recent three-month period compared to the prior three months, up three points from November (on a seasonally-adjusted basis). 

A net 18 percent of those surveyed expect higher real sales in the coming months, seasonally adjusted, down three points. Owner satisfaction with inventories indicates they are still too high: a negative net 7 percent reported stocks “too low” and the net percent of firms intending to increase stocks remained at a net zero percent (seasonally adjusted).

“The plunge in the frequency of reported price hikes was good for the Federal Reserve but not so good for small- business owners,” Dunkelberg said, noting that the net percent of firms raising average selling prices fell nine points in December to 8 percent, seasonally adjusted. Price pressures peaked in April, with a net 26 percent of owners raising average selling prices. “The December figure, if it holds, represents a major reduction in inflationary pressure,” Dunkelberg said. Unadjusted, 23 percent reported raising average selling prices, down five points, and 16 percent reported lower selling prices, up three points.

The net percent of firms reporting improved earnings gained three points from November levels. Heavy price-cutting did not help, but firms reported improvements in sales trends. A net 21 percent of all owners reported raising employee compensation, down four points from November. The decline in energy costs that boosted profits later in the year have vanished for the time being, but good weather is producing lower monthly energy bills.

Of the firms reporting higher earnings (20 percent), 70 percent cited stronger sales, 10 percent higher selling prices, and 5 percent each credited lower labor costs and lower materials costs. For the 34 percent reporting lower earnings compared to the previous three months, 44 percent cited weaker sales, 9 percent higher materials costs, and 6 percent each higher labor costs, higher insurance costs and lower selling prices. Three percent blamed higher taxes and regulatory costs.

Regular borrowing activity was reported by 35 percent of the owners, down three points from November, still stuck in the pattern of the last fifteen years. There is no evidence that firms are having cash flow problems. The net percent of owners reporting loans harder to get in recent months was unchanged at a net 6 percent (7 percent said “harder,” one percent said “easier”), typical of recent readings and no evidence here that credit is tighter.

More firms cut stocks than increased them in December. A net negative 3 percent of owners reported a gain in inventory (seasonally adjusted). Unadjusted, 5 percent reported gains and 18 percent reported inventory reductions. For all firms, a net negative 7 percent reported stocks too low, one point worse than November.

The frequency of reported capital outlays over the past 6 months rose four points to 61 percent of all firms. Forty-one percent reported spending on new equipment, 26 percent acquired vehicles, and 14 percent improved or expanded their facilities. Six percent acquired new buildings or land for expansion and fourteen percent spent money for new fixtures and furniture. Reports of capital spending in December were much the same as those reported all year, solid but not spectacular. Plans to make capital expenditures over the next few months dropped five points to 26 percent.

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