Small Business Outlook Improves In February 2012 – Second Highest Reading Since Start of 2007 Recession

Econintersect: The NFIB’s monthly optimism index rose 0.4 to 94.3:

• sixth consecutive month of gains
• still historically low
• the Index is lower than that of February 2011
• is the second highest reading since December 2007.

The fun in reading the NFIB reports comes from the blasts directed at Washington.  This month, the blast was muted.

“Bottom line, the economy is holding on to tenuous gains, moving ahead in fits and starts which, hopefully, average out to a positive growth number. First quarter growth will not likely match that of the fourth quarter,  but will remain positive.  In the meantime, we will crawl toward the November election to get a clearer picture of our future.”

The report goes on to say:

The Index posted its 6th monthly gain, but it is still 0.2 points below its level in February 2011.  No progress here, even with a six month positive trend.  The good news is that things are getting better, although improving at a glacial pace.  The jobs numbers are looking better, but with such unusual weather, one is never sure just what the seasonal adjustments are doing to the measures.  The NFIB statistics for its 350,000 members do indicate that jobs are finally being created, but again, at a slow pace. Adding millions to our population over the past few years certainly helps lift the need for workers, as well as for provide them.

NFIB inflation numbers are benign retrospectively, with a net 1 percent of owners raising prices.  But, 1 in 5 plan to raise prices over the coming months and if those stick, the numbers will get worse for those hoping for low inflation. The price of gasoline is a wild card going forward now that the Federal Reserve has set its inflation target based on the headline PCE (personal consumption expenditures) inflation rate and not the core which excludes food and energy.  Of course the Federal Reserve can argue that any surge in inflation driven by gas prices will be temporary, the argument used to justify using core inflation measures, and thus not relevant to policy determination.

It appears that the adjustment of inventories to lower consumer spending is about done.  As many firms reported increasing stocks as reported declines, the best reading since 2007.  And those reporting stocks “too low” exceed those reporting “too high” by 2 percentage points, one of the best readings over the history of the survey.  Stocks are lean and more firms plan to add to stocks than plan to reduce them.

Reports of capital spending continue to improve, although the percent of owners characterizing the current period as a good time to expand fell and remains low.  Over the 4 years of recession and weak recovery, stuff wears out, roofs leak, etc. and this prompts more capital spending.  But there is no exuberance there as plans to make outlays in the future fell a bit.

For those who want a summary of the survey:

• A vast improvement over January’s stalemate, the net change in employment per firm seasonally adjusted last month was 0.11. The increase from 0.0 is indicative of some real job creation. Seasonally adjusted, 12 percent of the owners added an average of 3.4 workers per firm over the past few months, and 14 percent reduced employment an average of 2.4 workers per firm. The remaining 74 percent of owners made no net change in employment. Forty-two percent of owners hired or tried to hire in the last three months and 32 percent of them reported few or no qualified applicants for positions. The ability to find qualified applicants for available jobs continues to be a problem for many small-business owners. The net percent of owners planning to create new jobs (in the next three months) fell 1 point to 4 percent (seasonally adjusted), the third monthly decline.

• The net percent of owners expecting higher real sales gained 2 points to a net 12 percent of all owners (seasonally adjusted) but still 2 points below a year ago. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 1 point, falling to a net negative 7 percent, still more firms with sales trending down than up. Reports of positive earnings trends gained 5 points in February, rising to a net negative 19 percent. This is the best reading since October 2007. Profits are an important source of capital to grow small firms, so this improvement in profit trends is a welcome development.
  

• Reports of capital spending continue to improve, although the percent of owners characterizing the current period as a good time to expand fell in February and remains historically low. The frequency of reported capital outlays over the past six months rose 2 points to 57 percent, building on the solid gain posted in December. Plans for future expenditures are a little bleaker, however. The percent of owners planning capital outlays in the next three to six months fell 1 point to 23 percent. Eight (8) percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point. The net percent of owners expecting better business conditions in six months was a negative six percent, down 3 points, and 15 percentage points lower than last year’s reading. Not seasonally adjusted, 17 percent expect deterioration (down 1 point), and 21 percent expect improvement (down 1 point).

• Financing remained low on the list of concerns for small-business owners. Only four percent cited financing as their top business problem, compared to 21 percent each citing taxes and unreasonable regulation. Ninety-three percent reported that all their credit needs were met or that they were not interested in borrowing. Thirty-one percent reported all credit needs met, seven percent reported that not all of their credit needs were satisfied (the record low is four percent, reached in 2000) and 50 percent said they did not want a loan, 62 percent if the 12 percent of those who did not answer the question are included, presumably uninterested in borrowing as well. Thirty-two percent of all owners reported borrowing on a regular basis, unchanged from January. A net 8 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), also unchanged. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10 percent (more owners expect that it will be “harder” to arrange financing than easier), 1 point worse than January.

Steven Hansen

source: NFIB