SEMA eNews Vol. 10, No. 26, June 28, 2007

SMALL-BUSINESS TRENDS—HOW DO YOU COMPARE?

Small-business owners showed neither excitement nor anxiety over the state of the economy in May, according to the National Federation of Independent Business (NFIB). Their outlook, as measured by the NFIB Small Business Optimism Index, edged up four-tenths of a point from April to 97.2 (1986=100). The good news is that the NFIB says that there is no recession signal—its Index has been consistent in anticipating the approach of recessions throughout the organization's 34-year history. NFIB's data also provides specialty-equipment companies, many of which are small businesses themselves, a benchmark to compare the activity of their own business to others in the country.


Job openings fell and are expected to nudge unemployment up, but unfilled positions remain high. Job-creation plans, although strong, were flat. Reports of price hikes eased, but continue higher than desired. Capital-spending plans, such as actual outlays, were unchanged from the previous month.

On the labor front, employment gains were solid but not spectacular—about 50,000 fewer workers were hired per month in May 2007 than in May 2006. "This year's May employment gains were as expected," said NFIB Chief Economist William Dunkelberg. "The NFIB survey has anticipated solid gains all year."

Nearly one-fourth of owners, 24%, reported unfilled job openings, down two points from April, but historically strong. Twelve percent said the availability of qualified labor was their top business problem, unchanged since February.

Over the next three months, one-fourth plan to create new jobs, up one point, and 6% plan workforce reductions, up two points, yielding a seasonally adjusted net 13% of owners planning to create new jobs, historically strong and unchanged from April. Fifty-four percent reported hiring or trying to hire new workers, though 78% of those reported "few or no qualified applicants" for their positions. Job-creation plans were positive in all industry groups.

Capital spending in May was flat. Plans to make outlays in the coming months remained weak, unchanged from April's 29% of owners. Profit gains have not triggered a boom in spending. Reported capital outlays over the past six months held firm at 60%. Nearly half (45%) reported spending on new equipment, 24% acquired vehicles, 17% bought fixtures and furniture and 13% improved or expanded their facilities. Five percent acquired new buildings or land for expansion.

An unchanged and rather weak 12% said now is a good time to expand facilities. A net-negative 3% expect conditions to improve over the next six months, up five points from April and typical of readings at later stages of an expansion. A net 16% expect higher real sales, up two points, and a positive sign for growth. Overall, expectations for economic growth are soft, but better. "Growth will continue," said Dunkelberg, "but the increase in GDP will be closer to 2% than 3%."

There were signs of inventory investment. A net 2% of owners reported a gain in inventory stocks, seasonally adjusted, four points higher than April. A seasonally adjusted, net-negative 6% reported stocks too low, a three-point drop from April. Dunkelberg noted, "The build in inventories was apparently unexpected and unwelcome."

Twenty-eight percent of those surveyed reported higher sales, and 31% had lower sales, producing a seasonally adjusted net 1% of all firms with higher sales in the most recent three-month period, compared to the prior three months, down three points from April.

Of the 21% reporting higher earnings, nearly two-thirds (65%) cited stronger sales, and 5% each cited lower materials costs and higher selling prices. For the 40% reporting lower earnings, two-fifths cited weaker sales, 8% blamed higher labor costs, 10% cited higher materials costs and 5% each pointed to higher insurance costs, lower selling prices and regulatory costs.

Unadjusted, 29% reported raising average selling prices, up one point, and 12% reported lowering them, down one point. The number of firms with earnings improvements gained in May, but the number of those reporting higher worker compensation rose three points to 29%. Only 16% managed to raise average selling prices. "Labor compensation will be pressuring profit margins all year," the NFIB economist said.

"The good news is that prices appear to be leveling off," Dunkelberg said. "The net percent of those reporting higher-average selling prices, seasonally adjusted, fell but only by two points to 16%, not enough to get real inflation down to the level the Fed would like."

Source: Sharp, Melissa. (June 12, 2007). "SBET: Small Business Chugs Along: No Signs of Recession." The National Federation of Independent Businesses. Retrieved June 20, 2007 from www.nfib.com.