NFIB Small Business Optimism Index Still Gloomy

The National Federation of Independent Business (NFIB) Small Business Economic Trends Report for April indicates that small business optimism remains at historic low levels. The report published since 1973 measures small business sentiment on numerous economic and business factors confronting small businesses.

Aprils report indicates a continued decline in business optimism. The NFIB index fell 1.2 points in March to 86.8 That’s up from the lows of March 2009, but has remained below 90 for 18 consecutive months. The report reading is a contra indicator of a strong recovery. Small business owners are by nature and temperament optimistic and the report provides a sobering insight into the mind of US entrepreneurs and risk takers who are expected to be a leading driver of the economic recovery.

Some observations on the NFIB report

Job Creation: 17% of respondents say they will reduce workforce. 15% indicated they are planning on hiring. A net negative sentiment of 2% of respondents. If SME sector is the leading source of new job creation the sector seems reluctant to assume the leadership in driving employment growth.

Credit: Only 5% of respondents indicated credit as a problem. 35% of respondents that required a credit facility within the last 6 months indicated it was more difficult to access. 89% of respondents indicated that credit facilities were suitable to meet existing needs. Interesting finding that contradicts prevailing sentiment about credit starved SMEs. It may have to do more with the population sample that have a track record of longevity and business success. Entrepreneurs and start-ups do not represent a significant percentage of survey sampling. NFIB member firms may be more fiscally sound then the overall population of SMEs.

Profitability: 43% of respondents reported declining profits. That is 39 points worse than the best expansion reading reached in 2005. Profits drive capital spending and this may be interpreted as a red flag for a sustained economic recovery. Causes of lower earnings: 62 % cited weaker sales, 2 % blamed rising labor costs, 5% higher materials costs, 3% higher insurance costs, 7% blamed lower selling prices and 5% percent blamed taxes and regulatory costs. Declining sales correlates with the economic reality of recession as does lower selling prices. The respondents that traced declining profitability due to rising costs is a bit alarming because of the benign influence inflation has had during the economic slowdown.

Highlights of the NFIB Report:

Jobs: After a devastating period of employment reductions, employment change per firm hit the “zero line” in March, setting the stage for a resumption in job creation. Nine percent (seasonally adjusted) reported unfilled job openings, down two points, a “negative” for hope that the unemployment rate will fall. Over the next three months, seven percent plan to reduce employment (down one point), and 15 percent plan to create new jobs (up two points), yielding a seasonally adjusted net negative two percent of owners planning to create new jobs, weaker than February and still more firms planning to cut jobs than planning to add.

Credit: Regular NFIB borrowers (35 percent accessing capital markets at least once a quarter) continued to report difficulties in arranging credit. A net 15 percent reported loans harder to get than in their last attempt, up three points from February. Eighty-nine (89) percent of the owners reported all their credit needs met or they did not want to borrow. Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many good borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory and take out the usual loans used to support these activities. Only five percent of the owners reported “finance” as their top business problem (up two points). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. What businesses need is sales, giving them a reason to hire and make capital expenditures and borrow to support those activities.

Profits: Reports of positive profit trends worsened by four points in March, registering a net negative 43 percentage points (39 points worse than the best expansion reading reached in 2005). The persistence of this imbalance is bad news for the small business community. Profits are important for the support of capital spending. For those reporting lower earnings compared to the previous three months (58 percent, up three points), 62 percent cited weaker sales, two percent blamed rising labor costs, five percent higher materials costs, three percent higher insurance costs, and seven percent blamed lower selling prices. Five percent blamed taxes and regulatory costs. Owners continued to reduce compensation at historically high rates, with 10 percent reporting reduced worker compensation and 10 percent reporting gains. Seasonally adjusted, a net zero percent reported raising worker compensation, only two points better than February’s record low reading of negative two percent.

Prices: The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative 20 percent, one point better than last month. Plans to raise prices fell one point to a net seasonally adjusted nine percent of owners. On the cost side, five percent of owners cited inflation as their number one problem (e.g. costs coming in the “back door” of the business) and only three percent cited the cost of labor, so neither labor costs no r materials costs are pressuring owners.

Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages, Credit Markets

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.

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