NFIB: Optimism Hanging Tough Among Small-Business Owners

WASHINGTON, D.C.—Few cries of “humbug” were heard from small-business owners in December and their outlook signals a solid year in 2006—weather permitting. Optimism measured by the NFIB Research Foundation rose by two-tenths of a point to 101.4 (1986=100), holding on to its solid fourth quarter performance.

Positive signs were found among job creation, inventory investment and capital spending data, possibly forecasting good news for domestic spending growth. NFIB Chief Economist William Dunkelberg said November and December readings indicate that the economy is hot, but not sizzling. Inflation, which gave researchers a fright in November, eased. “Consumers may cut back a little, but increased government and investment spending could offset much of the decline,” Dunkelberg said. “Domestically, things look pretty good for a solidly performing economy in 2006, but it won't set any records for growth.”

Employment increases offset reductions in December, adding virtually no new employees per firm. Slightly more than half of those surveyed hired or tried to hire one or more workers, while more than eight of 10 said they could find few or no qualified applicants. The leading business problem, 9 percent said, is the availability of qualified workers, a trend that has risen in recent months and signals tighter labor markets. That means more pressure on labor compensation and, possibly, lower profits. Hiring plans in all industries were solid.

The number of small-business owners planning to add to their inventories rose a point to a surprising net 9 percent in December, a level rarely reached. Seasonally adjusted, a net 3 percent increased inventories. A net-negative 3 percent (seasonally adjusted) reported inventories too low, a relatively lean posture. Owners say they don't see a problem with current stocks relative to sales. 

Reports of quarter-to-quarter sales volume gains rose four points to a net 8 percent of all owners and reports of sales gains, unadjusted, were good, with 28 percent reporting higher sales.

Although easing a point to 63 percent, owners reported solid capital outlays over the past six months. Nearly half picked up new equipment, slightly more than one-fourth added vehicles, 16 percent spent for fixtures and furniture and 15 percent enhanced facilities.  Eight percent acquired new buildings or land.
 
Plans to make early-year expenditures fell a point to one-third of all firms, leaving the outlook solidly optimistic. The number of owners convinced that the current period is a good time to expand facilities rose one point to 21 percent of all owners. A net 12 percent expect conditions to improve over the next six months, up one point and surprisingly strong at this stage of the expansion. A net 21 percent expect higher real sales over the next six months, down two points from November, but a solid reading.  

Those reporting higher selling prices fell eight points to 18 percent seasonally adjusted.   The four-quarter moving average percent of owners planning to raise prices fell in the fourth quarter to 26 percent, while the moving average of actual price-hike reports has been at 20 for three quarters, a pattern similar to the late 1980s that may signal a peak for inflation in this cycle.

The frequency of reports of profit improvements did not change. Reports of sales gains were solid and owners raised prices, but it wasn't enough to make profits stronger. Of the 21 percent reporting higher earnings, 67 percent cited stronger sales, up 19 points, and 10 percent credited higher selling prices. For those reporting lower earnings over the previous quarter, 34 percent cited weaker sales, 20 percent named materials costs, 9 percent blamed sales-price reductions, 6 percent pointed to more expensive insurance and 3 percent pointed to higher taxes and regulatory costs. 

The overall balance between reports of higher compensation costs (a net 26 percent) and reports of higher average selling prices (a net 18 percent) deteriorated from a profit perspective; more firms had labor cost hikes than were able to pass them on in higher prices. If this imbalance persists, profits will deteriorate.

Regular borrowing activity fell four points from November to 34 percent, and the net percent of owners reporting loans harder to get in recent months remained historically low at a net 3 percent. The reported cost of short-term money was 7.9 percent. Only three percent cited the cost and availability of credit as their number-one business problem. Thirty-five percent reported all their credit needs met, compared to 5 percent who reported problems obtaining financing.

Overall, for the small-business sector (producers of half the private Gross Domestic Product), 2006 is off to a good start, with the Optimism Index solidly above the 30-year average and plans for capital spending, inventory investment and job creation solidly above historic averages.