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WASHINGTON, D.C. – Plans for small-business job creation, inventory investment and capital spending gained strength in May as the outlook for the near-term economy improved, according to the National Federation of Independent Business’s (NFIB) Small Business Economic Trends report released Tuesday. The survey’s Optimism Index climbed a point to 100.8, reversing a five-month decline from a record-high last November.
“Small-business owners are quite optimistic about the near-term economic outlook,” said NFIB Chief Economist William Dunkelberg. “Optimism is, at this point in the expansion, normal in comparison to prior growth periods.”
Although the percent of owners who think now is a good time to expand is weaker than at similar points in the last two major expansions, it remains solid. Earnings reports look good, and there is a favorable balance for profits between higher labor compensation and higher average selling prices, a view not seen since the mid-1980s. Overall, May was another solid performance in the sector – not too fast, not too slow.
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The outlook for job creation brightened during May as the net percent of owners planning employment increases rose 4 points to a net 15 percent, seasonally adjusted. Firms with at least one hard-to-fill job opening remained unchanged at 23 percent. Only 12 percent reported using temporary or leased employees, down from 17 percent a few months ago. This is the result of stronger full-time hiring, making temporary workers less necessary.
Earnings gains climbed smartly from April, driven by solid pricing power, more frequent sales gains and moderate compensation rises. Of the 21 percent who cited rising profits, 57 percent credited stronger sales while 10 percent noted higher sales prices. Among the one-third of owners claiming lower earnings, 35 percent pointed to weaker sales, 17 percent blamed materials costs, 6 percent each named insurance and sales price reductions. Only 3 percent complained about the cost of labor. Employee compensation, the largest cost item to small firms, fell 4 points to 22 percent in May.
One-third of small firms now say they have plans to make capital expenditures in the next three-to-six months. While not spectacular, this one-point increase is evidence of a solid spending outlook. Plans for capital expenditures were most frequently reported among wholesale and manufacturing firms (48 percent). Job creation plans among those industries have been strong.
Capital spending remains solid. Outlays during the past six months were firm, up 1 point to 64 percent. Forty-seven percent confirmed spending for new capital equipment, 26 percent acquired vehicles and 17 percent bought items such as fixtures and furniture. Fourteen percent improved or expanded facilities, and 7 percent acquired new buildings or land for expansion.
There was no change in the number of those expecting improved business conditions over the next six months.
A net 3 percent reported increasing inventories, contributing to second-quarter GDP growth. NFIB researchers said the gain was not due to weak customer demand because reports of sales increases were more frequent in May than in April.
Those planning to build stocks rose one point to a solid net 5 percent. Success in building inventories to desired levels was apparent as more firms reported holdings “too high” than “too low.”
The net percent of firms reporting increased sales volumes (quarter over quarter) rose 4 points to a respectable net 6 percent. Twenty-seven percent (seasonally unadjusted) noted higher sales, up 2 points from April.
The net share of owners claiming higher selling prices fell 1 point to 34 percent, but those reporting reductions remained at 10 percent. Near-term price pressures have abated; reports of higher selling prices remained at 23 percent.
In recent months, regular borrowing by small firms has risen. While not a trend, it reached 40 percent in May, one of the highest levels since 1989. The net share of those having more difficulty getting loans in recent months held at a net 5 percent, no sign that capital markets are less friendly.
Only 2 percent of owners cited the cost and availability of credit as their main business problem. Strong cash flow and profitability are providing the funds for capital spending. More than two-fifths (41 percent) reported meeting all their credit needs compared to 4 percent who had problems. But rates are rising. The net percent reporting higher rates on their most recent loans has risen from minus 1 percent in June to 27 percent in May. The net percent expecting credit conditions to ease was minus 8 percent, 2 points worse than April.