Small-business optimism inches higher in November

CNY Business Journal (1996+), Dec 20, 2002 by Kropf, Annemarie

Small-business optimism rose in November, according to the latest survey from the National Federation of Independent Business (NFIB). Fueling the increase were employment gains, increased inventory investment, and steady capital-spending plans.

"Although business isn't surging, small-business owners are moving the economy along slowly," said William Dunkelberg, chief economist at the NFIB. "The economy has grown [more than] 3 percent since the terrorist attack, close to the average growth rate of 3.5 percent."

Last month, the index of Small-Business Optimism rose 1.5 points to 101.9 points. This is the highest optimism has been since June of this year. The increase in optimism puts the NFIB forecast for real gross domestic product growth above 3 percent for the fourth quarter.

"The revised third quarter GDP release exposed our forecast of 3.1-percent growth as too conservative, coming in at 4 percent. This was much better than the second quarter's 1.1percent performance."

The cost and availability of insurance continued as a top concern for small-business owners, taking second place in the balloting for the single most important business problem at 19 percent of the votes. Insurance was narrowly beaten by taxes, which garnered 20 percent of the votes. The third place went to poor sales with 16 percent of the vote.

Sales trends improved in November, as the net percent of firms reporting higher sales was -5 percent, up 2 points from October. However, this did not translate into higher earnings, as the net percent of firms reporting better earnings was down 3 points at -19 percent. The two biggest drags on earnings continue to be an inability to raise prices and increases in labor compensation, according to the report.

In November, job creation turned positive for the first time in 17 months. Small firms added a seasonally adjusted average of .3 employees per firm. Eighteen percent of owners reported paying higher workers' compensation over the past three months, one of the lowest readings since 1993, and 16 points below the record high reached in 2000. Plans to raise workers' compensation were steady at 14 percent of all firms.

Small-business owners continued to liquidate inventories, not at a strong pace, but they are still selling off the shelf rather than ordering new inventory. The percent of firms reporting inventory accumulation was unchanged at -3 percent in November. This was the twentieth consecutive month in which more firms. reported inventory reductions than reported gains. Plans to add inventories in the future jumped 4 points to a seasonally adjusted 9 percent of all firms, a point shy of the record high.

Thirty percent of all firms reported for the third straight month that capital-spending plans were unchanged. The current readings are comparable to the 1992-93 experience, but that recession was not preceded with the huge capital-spending boom before 2001. Plans to make new capital outlays were particularly strong in the services sector. Reports of actual outlays in the past six months were steady at 61 percent of all firms.

"The third-quarter GDP report confirmed what the NFIB survey anticipated solid economic growth led by government spending and supported by consumers," said Dunkelberg. "This also means that growth for the 12 months following the Sept. 11 terrorist attacks has averaged over 3 percent, just short of the long-run growth rate of 3.5 percent. That's a solid performance, considering how shallow and short the recession was. Sluggish employment gains are to be expected in a recovery from such a short and shallow recession. Owners are very optimistic about economic growth for the economy in the first half, but this has not translated into optimism about their own sales."

NFIB's Small Business Economic Trends is a monthly survey of small-business owners' plans and opinions.