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posted on 10 March 2015

February 2015 Small Business Optimism Insignificantly Improves but Still at Third Highest Reading Since 2007

Econintersect: The National Federation of Independent Business (NFIB)'s optimism index improved insignificantly from 97.9 to 98.0. The market was expecting the index between 96.5 to 100.0 with consensus at 99.0. Small business optimism held on to January's reading in spite of rather slow economic activity and really bad weather in half the country.

NFIB chief economist Bill Dunkelberg states:

In spite of slow economic activity and awful weather in a lot of the country, small business owners are finding reasons to hire and spend which is great news. Of the ten components, owners reporting hard-to-fill job openings was the largest gain increasing three points to a 29 percent which is a nine year high.

Though the economy lost momentum in the fourth quarter, imports grew substantially and reduction in oil prices contributed to consumer spending and saving. Small businesses are also beginning to return to their prerecession production of about half the private Gross Domestic Product and employment of half of the private sector workforce.

Large firms have been powering the economic recovery since the Great Recession, but that may be shifting to the small business sector. February's data suggests there are fundamental domestic economic currents leading business owners to add workers and these should bubble up in the official statistics and support stronger growth in domestic output.

Report Overview:

The Small Business Optimism Index rose 0.1 points to 98.0, holding on to January's reading in spite of rather slow economic activity and really bad weather in half the country. The good news is that job market indicators held up well, anticipating better job numbers and a lower unemployment rate. Reported capital spending improved and capital expenditure plans remained unchanged. The reverse was true for inventories where actual inventories remained unchanged from January and inventory plans improved. Unfortunately reported sales trends fell but, owners are still finding reasons to hire and spend which will eventually show up in the official statistics.

The percent of owners reporting higher worker compensation dropped 5 points to a net 20 percent, but plans to increase comp gained 2 points to a net 14 percent. There is still no evidence that more widespread reports of higher compensation is pushing owners to raise prices significantly. The net percent of owners reporting higher selling prices was 0 in February.

Some other highlights of this Optimism Index include:

Owner Optimism. Owner optimism stabilized, but the economy did not as GDP growth was revised down from 2.6 to 2.2 percent. The Index of Small Business Optimism gained 0.1 points to reach 98.0, the long-term average including the Great Recession and the third highest reading since early 2007. Only eclipsed by November and December 2014 which were a bit higher. Of the ten Index components, the largest gain was in the percent of owners reporting hard-to-fill openings (3 points). Changes were smaller in other components, 2 points for inventory investment plans, -2 points for job creation plans, less for the other components. Overall, not a lot of movement in the overall Index or in the components. Inflation pressures remained tame, with a net 0 percent raising prices. Reports of higher compensation fell 5 percentage points to 20 percent of all firms, reports of profit improvements were unchanged. Steady is good, establishing a firmer rut in the road to faster growth in 2016.

Labor Markets. The percent of owners reporting an increase in employment fell 1 percentage points to a net 4 percent of owners, a solid number. The percent of owners cutting jobs rose 3 points to 11 percent while the percent increasing employment gained 2 points to 15 percent. Overall, the average increase in workers per firm was 0.16 workers per firm, unchanged from January's solid reading. Those increasing employment added an average of 3.4 workers while those reducing their workforce cut an average of 2.9 positions. Fifty-three percent reported hiring or trying to hire (up 5 points), but 47 percent (89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twelve percent reported using temporary workers, down 2 points. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading since April 2006. Fourteen percent cited the availability of qualified labor as their top business problem, the highest since September 2007. A net 12 percent planning to create new jobs, down 2 points but a solid reading. GDP growth in 2014 Q4 was revised down to 2.2 from the initial estimate of 2.6 percent. This is a substantial slowdown from the mid-2014 pace. Consumer spending was still fairly solid in Q4 but has shown little strength so far this year. Even so, the labor market indicators are showing very solid strength. The job openings figure is one of the highest in 40 years and this suggests that labor markets are tightening and that there will be more pressure on compensation in the coming months. The monthly BLS employment report has been significantly revised each month recently and the revisions have been positive. But winter east of the Mississippi has not been conducive to growth and increased employment. All this considered, the NFIB data correctly anticiapted solid job growth, just short of the 300,000 average of the past few months, and a lower unemployment rate based on the surge in reports of hard-to-fill job openings.

Capital Spending. Sixty percent reported outlays, up 1 point from January and the strongest reading since October 2007. Of those making expenditures, 43 percent reported spending on new equipment (up 2 points), 25 percent acquired vehicles (down 2 points), and 16 percent improved or expanded facilities (up 2 points). Eight percent acquired new buildings or land for expansion (up 3 points) and 12 percent spent money for new fixtures and furniture (up 1 point). The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 26 percent, the third best reading for this expansion but still weak historically. Of the 43 percent of owners who said it was a bad time to expand (down 4 points since November), 23 percent (up 4 points) still blamed the political environment. The net percent of owners expecting better business conditions in six months dropped 1 point to a net negative 1 percent. A net 15 percent of all owners expect improved real sales volumes, down 1 point after a 4 point decline in January. Still good readings for this expansion, but historically not so hot.

Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months retreated 3 points, falling to a net negative 6 percent. After a 5 point decline in January, this indicator has returned to the low for 2014 reached in March of last year. Consumer spending was quite strong in the fourth quarter, rising over 4 percent at an annual rate, but has apparently slowed down a bit since then. Twelve percent cited weak sales as their top business problem, down 1 point from January. Expected real sales volumes posted a 1 point decline, falling to a net 15 percent of owners expecting gains, after a 4 point decline in January. Sales prospects are still looking reasonably good to owners, just not as hot as in the fourth quarter last year.

Inventory. The pace of inventory change remained positive, with a net 2 percent of all owners reporting growth in inventories (seasonally adjusted), unchanged from January. Owners are building inventory. This is the fourth non-negative month in a row, and the first string of positive numbers since early 2007. The net percent of owners viewing current inventory stocks as "too low" deteriorated 1 point to a net negative 2 percent, historically a fairly "satisfied" reading. The net percent of owners planning to add to inventory stocks rose 2 points to 4 percent, a very solid reading. If businesses accumulate inventory faster than spending rises in Q1, this will depress growth in 2015 Q2 if owners pull back on inventory investment.

Inflation. Seasonally adjusted, the net percent of owners raising selling prices was a net 0 percent, a very "tame" reading. There are no inflation pressures coming from Main Street. Seasonally adjusted, a net 19 percent plan price hikes (unchanged). A stronger economy will allow owners to actually realize their plans to raise prices, but so far, reports of actual price hikes and early indicators of first quarter economic activity suggest that markets will not yet support higher prices.

Earnings and Wages. Earnings trends were unchanged at a net negative 19 percent (net percent reporting quarter to quarter earnings trending higher or lower). After surging in December, reports of increased labor compensation dropped 5 percentage points to a net 20 percent of all owners. Labor costs continue to put pressure on the bottom line but energy prices are down a lot. Four percent reported reduced worker compensation and 26 percent reported raising compensation. This should begin to show up in wage growth, although rising benefits offset potential increases in take-home pay. A seasonally adjusted net 14 percent plan to raise compensation in the coming months (up 2 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations including the healthcare law.

Credit Markets. Three percent of owners reported that all their credit needs were not met, holding at an historic low level. Thirty-three percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem (up 1 point) compared to 20 percent citing taxes, 21 percent citing regulations and red tape and 12 percent citing weak sales.

Steven Hansen

source: NFIB

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