Small businesses more optimistic about economy

WASHINGTON – May 15, 2014 – April’s Small Business Optimism Index rose 1.8 points to a post-recession high of 95.2 – the first time it crossed the 95 mark since 2007.

Seven index components improved, one was unchanged and two fell. The National Federation of Independent Businesses (NFIB) compiles the monthly index.

“April’s index did pass the 95 mark that seemed to block any progress in optimism for the past five years,” says NFIB chief economist Bill Dunkelberg. “However, the index is still 5 points below the average reading from 1973 to 2008, and far from what is considered expansion levels.”

While the 95 level seemed to be a cap on optimism that has now been passed, Dunkelberg does not yet consider the recession fully over.

“This reading can only be characterized as a high end recession reading,” he says. “Small business confidence rising is always a good thing, but it’s tough to be excited by meager growth in an otherwise tepid economy. … So while the improvement is welcome, as long as small business owners continue to have negative views about the future, the 95 number may fade.”

Review of April indicators

  • Labor markets. NFIB owners increased employment by an average of 0.07 workers per firm in April (seasonally adjusted), weaker than March but the seventh positive month in a row and the best string of gains since 2006. The remaining 74 percent of owners made no net change in employment.
  • Job creation. Twenty-four percent of all owners reported job openings they could not fill in the current period (up 2 points). This suggests that the unemployment will ease a tenth of a point or more. Fourteen percent reported using temporary workers, up 1 point from March. Job creation plans reversed a recent negative trend and rose 3 percentage points to a seasonally adjusted net 8 percent.
  • Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 4 points to a net negative 2 percent – far better than the negative 31 percent readings in 2009.
  • Expected real sales volumes posted a 2-point decline after a strong 9-point gain in March, falling to a net 10 percent of owners. While down a bit, it is still the third highest reading since early 2012.
  • Earnings and wages. Earnings trends improved 4 points to a net negative 20 percent (net percent reporting quarter to quarter earnings trending higher or lower), the best reading since 2007. Not seasonally adjusted, 15 percent reported profits higher quarter to quarter (up 3 points), and 41 percent reported profits falling (down 1 point).
  • Rising labor costs are keeping pressure on earnings. Two percent reduced worker compensation and 23 percent raised compensation, yielding a seasonally adjusted net 20 percent reporting higher worker compensation. The gains in compensation are now solidly in the range typical of an economy with solid growth.
  • Credit markets. Credit continues to be a non-issue for small employers. In April, just five percent of the owners reported that all their credit needs were not met, 1 point above the record low. Thirty percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 1 percent reported that financing was their top business problem (tied with the record low) compared to 22 percent citing taxes, 20 percent citing regulations and red tape and 15 percent citing weak sales. Small business owners are far more concerned about taxes, regulations and health care costs than financing issues.
  • Inventories. The pace of inventory reduction was steady, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted). Reductions are good if in response to strong sales, but not so good if it is in response to weak sales.
  • Inflation. Seasonally adjusted, a net 12 percent of owners raised selling prices, up 3 points after an 8-point rise in March. Twenty-five percent plan on raising average prices in the next few months (up 2 points). Only 3 percent plan reductions (unchanged) – far fewer than actually reported reductions in past prices. Overall, the report suggests the U.S. economy will see a bit more inflation.

© 2014 Florida Realtors®

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