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Small-Business Optimism Gains Two Points in April: Increase Only Returns the Index to Reading from February 2011

10 May, 2012


After taking a dip in March, the Index of Small Business Optimism gained 2 points in April, settling at 94.5. The reading is the highest since December 2007, however, April’s gain only returns the Index to its February 2011 level, indicating that in a year, the net gain has been zero. While March did not post strong job creation numbers, labor market indicators did improve, suggesting better job growth in the next few months.

“While the Index remains historically weak, there was good news in the details of April’s report. Job creation plans, job openings and capital spending plans all increased. Hopefully, this performance will hold in the coming months,” said NFIB Chief Economist Bill Dunkelberg. “However, GDP and employment growth news has not been good; the Euro debt crisis continues to make news and Congress leaves us on an identical path: huge deficits, a terrifying amount of liquidity at the Fed, and no indication that anything positive will be done. Most likely, there will be only small improvements on Main Street in optimism or hiring and spending this year. With the election six months away, the Index will signal how small firm owners see the economy’s future unfolding—and their outlook will be telling.”

Among the owners surveyed, most remain very satisfied with current inventory holdings. However, owners indicated that they do not plan on adding, consistent with a small deterioration in their expectations for real sales gains in the coming months. The percent of owners reporting positive sales trends quarter on quarter reached the highest level seen since April 2006. This was a major contributing factor to the huge improvement in reported profit trends, an 11 point gain and equal to half the improvement of the Index.

Some other highlights of April’s Optimism Index include:

Earnings and Wages: Overall, April was a great report for profits and sales, hopefully the beginning of a solid trend. Reports of positive earnings trends improved by 11 points, settling at a negative 12 percent in April—the best reading since April 2007. The improvement was driven by sales reports, also the highest since April 2007. Not seasonally adjusted, 19 percent of small firm owners reported higher profits (up 5 points), and 37 percent reported profits falling (down 6 points). Profits are the major source of capital for financing hiring and expansion for small firms, making this a very significant and welcome development. Three percent of owners reported reduced worker compensation and 18 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation, the highest reading in 39 months and unchanged from March. A net seasonally adjusted 9 percent plan to raise compensation in the coming months also unchanged from March.

Sales: Also a highlight of the April report, the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months gained another 3 points to 4 percent. This comes after a surprising 8 point gain in March, one of the only positive trends for that month. Nineteen (19) percent of owners still cite weak sales as their top business problem, a high reading, but far below the record 33 percent reading from December 2010. Sales are improving broadly in the small business sector, albeit not dramatically. Seasonally unadjusted, 25 percent of all owners reported higher sales, and 30 percent of owners reported lower sales (down 1 point). The net percent of owners expecting higher real sales in the months to come lost 2 points, falling to a net 6 percent of all owners (seasonally adjusted). Forty-one (41) percent of owners (no seasonally adjusted) expect improvement over the next three months (down1 point) and 19 percent expect declines (up 3 points). The improvement in sales trends is not indicative of a strong recovery but is a positive sign for small-business owners.

Job Creation: The net change in employment per firm (seasonally adjusted) came in at 0.1; this is down from March but still positive. Seasonally adjusted, 12 percent of owners surveyed added an average of 3.3 workers per firm over the past few months, and 14 percent reduced employment an average of 2.9 workers per firm. The remaining 74 percent of owners made no net change in employment. Forty-seven (47) percent of owners hired or tried to hire in the last three months. Thirty-four (34) percent of owners (or 72 percent of those trying to hire or hiring) reported few or no qualified applicants for positions. While firms have eased lay-offs, they haven’t resumed strong hiring. Unemployment claims remain high and seasonal adjustments are off track as hiring, normally done in March and April, may have occurred earlier in the year. The percent of owners reporting hard to fill job openings rose 2 points to 17 percent, one point below the January 2012 reading which is the highest we’ve reported since June 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate, making the gain in openings a welcome development. The net percent of owners planning to create new jobs is 5 percent, a 5 point increase after taking a plunge in March. Not seasonally adjusted, 18 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (unchanged from March).

Inflation: Inflation may become a problem for the small-business community in the months to come. Twenty-six (26) percent of the NFIB owners reported raising their average selling prices in the past three months (up 1 point), and 16 percent reported price reductions (down 1 point). Seasonally adjusted, the net percent raising selling prices was 8 percent, up 2 points from March and 9 points from January. Overall, price hikes were quite pervasive as owners respond to rising input costs (labor and materials) and try to pass those costs on to customers. Twenty-five (25) percent of owners plan on raising average prices in the next few months, while 2 percent plan reductions. Seasonally adjusted, a net 23 percent plan price hikes, up 2 points from March and 9 points higher from December. Price-cutting appears to be fading and this will put upward pressure on the inflation measures.

This report is based on the responses of 1,817 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of April.

Download the complete study at http://www.nfib.com/sbetindex.

NFIB’s Small Business Economic Trends is a monthly survey of small-business owners’ plans and opinions. Decision makers at the federal, state and local levels actively monitor these reports, ensuring that the voice of small business is heard. The NFIB Research Foundation conducts some of the most comprehensive research of small-business issues in the nation. The National Federation of Independent Business is the nation’s leading small-business association. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its members in Washington, D.C., and all 50 state capitals.
 

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