Small Business Optimism Rises – Activity Remains Low

Small business optimism may be rising, as indicated by the  latest report from the NFIB (National Federation of Independent Business), but nobody is cheering.  Climbing through the data finds much of small business activity is at levels seen in the bottom of previous recessions.  

Even the optimism is anemic.  The NFIB report leads with:  

The National Federation of Independent Business Index of Small Business Optimism rose 1.5 points in November rising to 93.2, the highest reading since December 2007, and the fourth consecutive monthly gain. The bad news: 93.2 is, from an historical perspective, still a recession-level reading (the average was about 100 before the recession started). The last time the Index was this low (prior to 2008) was in 1993. The recovery in the Index continues to underperform all recovery periods since 1973, the start of the NFIB surveys.  

“The Index is trending up, but at a very slow pace,” said Bill Dunkelberg, NFIB’s chief economist.  

Components of the Index 

The components of the index are summarized in the following table:  

NFIB small business index nov 2010Optimism   

All of the improvement in optimism comes from three items, two of which the business owner has no direct control over:  higher real sales and improvement in the economy.  The third item, plans to increase inventories, is within his control, but it will be a lagging factor happening only after the economy and sales are already improving.  All of the index components over which the business owner has a significant degree of control total to no change in optimism.

The small business owner is long on hope and short on confidence. 

A graph from Calculated Risk shows that small business optimism has risen just above the level of the bottom of the 2001 recession:  

NFIB Small Business Optimism Nov 2010  


The average increase in employment per firm turned positive in November, but just barely with the average gain of 0.01 workers per firm, hardly different from 0.  But it was not negative which is good news, sort of.  

From the NFIB report:   

Nine percent (seasonally adjusted) reported unfilled job openings, down 1 point and historically very weak.  This Index component is a very good predictor of the unemployment rate – and this number indicated the rate will nudge higher.  Over the next three months, 9 percent plan to increase their employment (up one point), and 12 percent plan to reduce it (down one point), yielding a seasonally adjusted net four percent of owners planning to create new jobs, a three point gain from October.  

The November increase (1.5 points) followed increases in October (2.7 points) and September (4 points).  This is an encouraging trend and the strongest reading since September 2008.  

“Overall, job creation is likely to continue but at a tepid pace,” said Dunkelberg.  

A Calculated Risk graph documents “tepid”:  

NFIB New Hiring Nov 2010  

Capital Spending and Outlook 

 Capital spending also increased: 

The frequency of reported capital outlays over the past six months rose four points to 51 percent of all firms, pulling away from the recent record low reading of 44 percent. The percent of owners planning capital outlays in the future rose two points to 20 percent, but is still historically quite low.  Money is cheap, most owners however are not interested in a loan.  Prospects are still uncertain enough to discourage any but the most profitable investments. Spending seems to be primarily in “maintenance mode” – if it breaks, replace it, but that’s it. 

 Nine percent characterized the current period as a good time to expand facilities (seasonally adjusted), up two points and seven points better than earlier in the year. A net 16 percent expect business conditions to improve over the next six months, a 31 point improvement since July, and the best reading since June 2005.  

“Apparently the future is looking brighter for more owners, although much will depend on what Congress does in the closing weeks of the year,” said Dunkelberg.  


Sales are disappointing but are nominally higher: 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months worsened by two points to a net negative 15 percent. Although 19 points better than March 2009, it is still indicative of very weak customer activity. Widespread price cutting contributed less to reports of lower nominal sales as fewer firms reported cuts in average selling prices. Overall, it does not appear that sales trends are yet supportive of a widespread recovery in the small business sector even if a bit stronger than October.  


The sales history is shown in the following graph.  Sales remain at levels nearly the same as the bottoms associated with the two previous recessions (1990-91 and 2001): 


NFIB small business sales nov 2010  

The net percent of owners expecting higher real sales gained five points from October, rising to a net six percent of all owners (seasonally adjusted), a nice bump on top of October’s four point gain.  

Not seasonally adjusted, 24 percent expect improvement over the next three months, 37 percent expect declines.  However, as seen in the graph, small businesses have consistently overestimated future sales.  


Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. A net-negative 15 percent of all owners reported gains in inventories (more firms cut stocks than added to them, seasonally adjusted), only a point better than October. Unadjusted, 10 percent reported gains in inventory stocks (unchanged), but 25 percent reported inventory reductions (unchanged).  

November is the 32nd negative double digit month in a row and the 42nd negative month in a row for inventory changes.  

For all firms, a net-negative 3 percent (down four points) reported stocks too low, an unexpected deterioration in owner satisfaction with current stocks (compared to expectations for sales and the economy that have actually improved). Plans to add to inventories rose four points to a net 0 percent of all firms (seasonally adjusted), a surprise with the increased dissatisfaction with current stocks.  


Fourteen percent of the owners (unchanged) reported raising average selling prices, and 20 percent reported average price reductions (down 2 points).  

Seasonally adjusted, the net percent of owners raising prices was a net negative 4 percent, a one point increase from October. Still, November is the 24th consecutive month in which more owners reported cutting average selling prices that raising them, a condition that might support concerns about deflation now worrying the Federal Reserve.  

Reports of higher worker compensation continued to edge up while reports of compensation cuts continued to fade.  Six percent reporting reduced worker compensation and 13 percent reported gains.  Seasonally adjusted, a net 8 percent reported raising worker compensation, double October’s reading and 10 points better than February’s record low reading of negative 2 percent.  


Earnings are still under pressure: 

Reports of positive earnings trends fell four points in November, registering a net-negative 30 percent. Still, far more owners report that earnings are deteriorating quarter-to-quarter than rising. Part of this is due to price cutting, which is fading in frequency as the economy continues to grow. 

Not seasonally adjusted, 15 percent reported profits higher (unchanged), but 43 percent reported profits falling, a three point increase.  

Of the owners reporting higher earnings, 60 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, 56 percent cited weaker sales, 5 percent blamed rising labor costs, 7 percent higher materials costs, 5 percent higher insurance costs and 9 percent blamed lower selling prices. Seven percent blamed higher taxes and regulatory costs.  


It seems that there is an unusually low demand for 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.  A record 53 percent said they did not want a loan (13 percent did not answer the question and might be presumed to be uninterested in borrowing as well). Only 4 percent reported financing as their #1 business problem.  

Low demand is matched by low availability.  Credit availability remained at levels last seen (before The Great recession) in the 1990-91 recession:  

NFIB small business credit nov 2010  

Biggest Problems Topping the list: 

30 percent of the owners reported that weak sales continued to be their top business problem, followed by 22 percent citing taxes and 15 percent government regulations and red tape (taxes that consumes capital and time). 

The sales problem is illustrated in the following Calculated Risk graph:  

NFIB sales problem nov 2010  

The historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new workers are not likely to pay the business back. This is a major cause of the lack of credit demand observed in financial markets.  However, 30% of small business owners saying they have a problem getting credit is off the chart historically.  

Small business may be the engine of economic and employment growth, but data indicates the engine is only weakly sputtering.  More is needed than an up tick in optimism.      

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