The National Federation of Independent Business Index of Small Business Optimism rose 1.5 points in November, rising to 93.2 -- the highest reading since December 2007, and the fourth consecutive monthly gain. The bad news: 93.2 is, from an historical perspective, still a recession-level reading [the average was about 100 before the recession started].The last time the index was this low [prior to 2008] was in 1993. The recovery in the index continues to underperform all recovery periods since 1973, the start of the NFIB surveys.
"The index is trending up, but at a very slow pace," said Bill Dunkelberg, NFIB’s chief economist.
Employment
After hitting "zero" in October, the average increase in employment per firm turned positive in November. The average gain per firm was .01 workers per firm -- hardly different from zero, but it was not negative, which is good news.
Nine percent [seasonally adjusted] reported unfilled job openings -- down one point and historically very weak. This index component is a very good predictor of the unemployment rate -- and this number indicated the rate will nudge higher.
Over the next three months, nine percent plan to increase their employment [up one point], and 12 percent plan to reduce it [down one point], yielding a seasonally adjusted net four percent of owners planning to create new jobs -- a three-point gain from October after a four-point gain in September, an encouraging trend and the strongest reading since September 2008.
"Overall, job creation is likely to continue, but at a tepid pace," noted Dunkelberg.
Capital Spending and Outlook
The frequency of reported capital outlays over the past six months rose four points to 51 percent of all firms, pulling away from the recent record-low reading of 44 percent.
Of those making expenditures, 35 percent reported spending on new equipment [up three points]; 19 percent acquired vehicles [up three points]; and 12 percent improved or expanded facilities [up zero point].
Four percent acquired new buildings or land for expansion [up one point], and 12 percent spent money for new fixtures and furniture [up three points].
The percentage of owners planning capital outlays in the future rose two points to 20 percent, but is still historically quite low.
"Spending seems to be primarily in maintenance mode," said Dunkelberg. "If it breaks, replace it."
Nine percent characterized the current period as a good time to expand facilities [seasonally adjusted] -- up two points, and seven points better than earlier in the year. A net 16 percent expect business conditions to improve over the next six months -- a 31-point improvement since July, and the best reading since June 2005.
"Apparently, the future is looking brighter for more owners, although much will depend on what Congress does in the closing weeks of the year," said Dunkelberg.
Sales and Inventories
The net percent of all owners [seasonally adjusted] reporting higher nominal sales over the past three months worsened by two points to a net-negative 15 percent -- 19 points better than March 2009, but still indicative of very weak customer activity. Unadjusted, 21 percent of all owners reported higher sales [last three months, compared to prior three months -- down two points], while 33 percent reported lower sales [up two points].
The net percent of owners expecting higher real sales gained five points from October, rising to a net six percent of all owners [seasonally adjusted] -- a nice bump on top of October’s four-point gain. Not seasonally adjusted, 24 percent expect improvement over the next three months, while 37 percent expect declines.
Small-business owners continued to liquidate inventories, and weak sales trends gave little reason to order new stock. A net-negative 15 percent of all owners reported gains in inventories [more firms cut stocks than added to them, seasonally adjusted] -- only a point better than October. Unadjusted, 10 percent reported gains in inventory stocks [unchanged], but 25 percent reported inventory reductions [unchanged].
November is the 32nd negative double-digit month in a row, and the 42nd negative month in a row for inventory changes. For all firms, a net-negative three percent [down four points] reported stocks too low, and an unexpected deterioration in owner satisfaction with current stocks [compared to expectations for sales and the economy that have actually improved]. Plans to add to inventories rose four points to a net zero percent of all firms [seasonally adjusted] -- a surprise with the increased dissatisfaction with current stocks.
Inflation
Fourteen percent of the owners [unchanged] reported raising average selling prices, and 20 percent reported average price reductions [down two points]. Seasonally adjusted, the net percent of owners raising prices was a net negative four percent -- a one-point increase from October.
Still, November is the 24th consecutive month in which more owners reported cutting average selling prices than raising them -- a condition that might support concerns about deflation now worrying the Federal Reserve.
Reports of higher worker compensation continued to edge up, while reports of compensation cuts continued to fade. Six percent reported reduced worker compensation, and 13 percent reported gains.
Seasonally adjusted, a net eight percent reported raising worker compensation -- double October’s reading, and 10 points better than February’s record-low reading of negative two percent.
Earnings
Reports of positive earnings trends fell four points in November, registering a net-negative 30 percent. Still, far more owners report that earnings are deteriorating quarter-to-quarter than rising. Part of this is due to price-cutting, which is fading in frequency as the economy continues to grow. Not seasonally adjusted, 15 percent reported profits higher [unchanged], but 43 percent reported profits falling -- a three-point increase.
Of the owners reporting higher earnings, 60 percent cited stronger sales as the cause, and seven percent credited higher selling prices. For those reporting lower earnings compared to the previous three months, 56 percent cited weaker sales; five percent blamed rising labor costs; seven percent, higher materials costs; five percent, higher insurance costs; and nine percent blamed lower selling prices. Seven percent blamed higher taxes and regulatory costs.
Credit
Overall, 91 percent reported that all their credit needs were met, or that they were not interested in borrowing. Nine percent reported that not all of their credit needs were satisfied. A record 53 percent said they did not want a loan. Only four percent reported financing as their No. 1 business problem.
However, 30 percent of the owners reported that weak sales continued to be their top business problem, followed by 22 percent citing taxes, and 15 percent citing government regulations and red tape [taxes that consumes capital and time].
The historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new workers are not likely to pay the business back. This is a major cause of the lack of credit demand observed in financial markets.
SOURCE: National Federation of Independent Business
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