Small Business Optimism Remains Weak

January 11th, 2011
in News, econ_news

Econintersect:

The National Federation of Independent Business Index of Small Business Optimism lost 0.6 points in December, dropping to 92.6, and disappointing those who were anticipating a rebound that might signify more growth in the small business sector.  Weak sales remains the top problem, stagnating hiring and spending on capital projects.  All of which are sidelining the small business sector from a recovery.  This marks the 36th month of Index readings in the recession level.

“The hope for a pick-up in the small business sector did not materialize, but new weaknesses did not appear either,” said William C. Dunkelberg, chief economist for the National Federation of Independent Business.  “More owners expect their real sales volumes to rise in the coming months, increasing the odds that more hiring and inventory investments will take place. Overall, owners remain stubbornly cautious and uncertain about the future course of the economy and their business prospects.

Optimism Components

Net %

Change

PLAN TO INCREASE EMPLOYMENT

6

+2

PLAN TO INCREASE CAP. OUTLAYS*

21

+1

PLAN TO INCREASE INVENTORIES

-3

-3

EXPECT ECONOMY TO IMPROVE

9

-7

EXPECT HIGHER REAL SALES

8

+2

CURRENT INVENTORY SATISFACTION

-3

0

CURRENT JOB OPENINGS*

13

+4

EXPECTED CREDIT CONDITIONS

-12

-2

NOW A GOOD TIME TO EXPAND*

8

-1

EARNINGS TRENDS

*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.

-34

-4

Follow up:

Employment

Job creation continued to hover around the “0” line, with average employment change per firm at a negative 0.07 employees (following a gain of .01 in November and 0.0 in October).  The average increase in employment per firm has been negative for 32 of the last 36 months.

Looking ahead, the picture brightens.  Thirteen percent (seasonally adjusted) reported unfilled job openings, a four point improvement that anticipates a reduction in the unemployment rate in the coming months.  Over the next three months, 10 percent plan to increase employment (up one point), and 9 percent plan to reduce it (down three points), yielding a seasonally adjusted net 6 percent of owners planning to create new jobs, a two point gain from December and the best reading in 27 months.

“However, until sales pick up, there is no pressing reason to hire, and job creation will remain slow,” said Dunkelberg.

Capital Spending and Outlook

The frequency of reported capital outlays over the past six months fell four points to 47 percent of all firms, only three points over the record low level.  These numbers suggest that owners remain in “maintenance mode,” unwilling to risk new capital investments or not seeing any need for them.  Of those making expenditures, 35 percent reported spending on new equipment (unchanged), 15 percent acquired vehicles (down four points), and 11 percent improved or expanded facilities (down one point). Four percent acquired new buildings or land for expansion (unchanged) and 8 percent spent money for new fixtures and furniture (down four points).

The percent of owners planning capital outlays in the future rose one point to 21 percent, but is still historically quite low.  With prospects still uncertain, many business owners remain hesitant to seek a loan for any but the most profitable investments.  Eight percent characterized the current period as a good time to expand facilities (seasonally adjusted), down one point but six points better than earlier in the year and the third highest reading since the economy peaked in December, 2007.

A net 9 percent expect business conditions to improve over the next six months, down seven points from November’s reading.  However, this is the second best reading since the fourth quarter of 2009 when the economy was expanding rapidly. 

Sales and Inventories

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months worsened by one point  to a net-negative 16 percent, 18 points better than March 2009 (near the recession bottom) but still indicative of weak customer activity. Unadjusted, 18 percent of all owners reported higher sales (last three months compared to prior three months, down three points), while 36 percent reported lower sales (up three points).  Although consumer spending appears to have risen at a robust 4 percent rate in the fourth quarter, small businesses did not appear to have benefited much from the spending gains.

The net percent of owners expecting higher real sales continued to rise, gaining two points to a net 8 percent of all owners (seasonally adjusted), an 11 point gain since September.  Not seasonally adjusted, 26 percent expect improvement over the next three months and 36 percent expect declines.

Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock.  A net-negative 13 percent of all owners reported growth in inventories (seasonally adjusted), down two points, but still more firms are cutting stocks rather than adding by a large margin. Unadjusted, 10 percent reported growth in inventory stocks (unchanged) but 23 percent reported inventory reductions (down two points).

Inflation

The downward pressure on prices appears to be easing as more firms are raising prices and fewer are cutting them.  Fourteen percent of owners (unchanged) reported raising average selling prices, and 20 percent reported average price reductions (unchanged).  Seasonally adjusted, the net percent of owners raising prices was a net-negative 5 percent, only one point different from November.  Still, December is the 25th consecutive month in which more owners reported cutting average selling prices, rather than raising them.  However, the trend is clearly supportive of higher prices in future months.  Widespread price cutting does contribute to the high percentage of firms reporting declining sales revenues, and this source of disappointing nominal sales trends will soon vanish.

Plans to raise prices rose two points to a seasonally adjusted net 15 percent of owners, the highest reading in 26 months.  With an improving economy, more and more of these hikes will “stick.”

“Overall, this is not a deflationary outlook, but price increases will remain moderate for some time,” said Dunkelberg.

Earnings

Reports of positive earnings trends fell four points in December, registering a net-negative 34 percent.  Still, far more owners report that earnings are deteriorating quarter on quarter, rather than rising, in part due to price cutting, which is fading in frequency as the economy continues to grow.  Not seasonally adjusted, 14 percent reported profits higher (down one point), but 47 percent reported profits falling, a four point increase.  Large firms may be posting great profits, but the trend on Main Street is not supportive of solid hiring and capital spending, all the result of continued weak sales.

Of the owners reporting higher earnings, 64 percent cited stronger sales as the cause and 7 percent credited higher selling prices.  For those reporting lower earnings compared to the previous three months, 55 percent cited weaker sales, 4 percent blamed rising labor costs, 6 percent higher materials costs, 2 percent higher insurance costs, 2 percent higher financing costs, and 4 percent blamed lower selling prices.  Six percent blamed higher taxes and regulatory costs.

Credit

Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing.  Nine percent reported that not all of their credit needs were satisfied, and 50 percent said they did not want a loan, down three points.  Five percent reported financing as their #1 business problem, up one point.  However, 33 percent of the owners reported that weak sales continued to be their top business problem, followed by 19 percent citing taxes and 13 percent government regulations and red tape.  The historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new employees are not likely to “pay back.”  This is a major cause of the lack of credit demand observed in financial markets.

Analysis and graphs available by Doug Short









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