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The Small-Business Optimism Index gained 0.4 points in February to 94.3 marking the sixth consecutive month of gains. While still historically low, the latest increase is a sign that the recovery is likely to continue, albeit at a glacial pace. The Index is lower than that of February 2011 but is the second highest reading since December 2007, the beginning of the recession. The National Federation of Independent Business (NFIB) report suggests that in February owners became slightly more pessimistic about the outlook for business conditions but more optimistic about future sales growth, making the reading mixed bag, although headed largely in the right direction.
“The good news for small-business owners and those watching the economy is that things are getting better. However, at this slow pace of growth and recovery, it could be years before we are again enjoying prosperity,” said NFIB Chief Economist Bill Dunkelberg. “The price of gasoline is a wild card, and rising energy costs will weigh heavy on the minds of small firm owners. The economy is holding on to tenuous gains, moving ahead in fits and starts which, hopefully, will result in future positive growth. First quarter growth will not likely match that of the fourth quarter, 2011, but it should remain positive. In the meantime, we will crawl toward the November election to get a clearer picture of our future.”
While the fog over Main Street appears to be lifting to some degree, confidence in the economy remains fragile. Twenty-two (22) percent of small-business owners report “poor sales” as their top business problem, unchanged from January. February’s report suggests cautious optimism but shows no signs of significant economic improvement that is needed to encourage owners to invest their own money in growing their businesses.
Some other highlights of February’s Optimism Index include:
• Job Creation: A vast improvement over January’s stalemate, the net change in employment per firm seasonally adjusted last month was 0.11. The increase from 0.0 is indicative of some real job creation. Seasonally adjusted, 12 percent of the owners added an average of 3.4 workers per firm over the past few months, and 14 percent reduced employment an average of 2.4 workers per firm. The remaining 74 percent of owners made no net change in employment. Forty-two percent of owners hired or tried to hire in the last three months and 32 percent of them reported few or no qualified applicants for positions. The ability to find qualified applicants for available jobs continues to be a problem for many small-business owners. The net percent of owners planning to create new jobs (in the next three months) fell 1 point to 4 percent (seasonally adjusted), the third monthly decline.
• Sales and Earnings: The net percent of owners expecting higher real sales gained 2 points to a net 12 percent of all owners (seasonally adjusted) but still 2 points below a year ago. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 1 point, falling to a net negative 7 percent, still more firms with sales trending down than up. Reports of positive earnings trends gained 5 points in February, rising to a net negative 19 percent. This is the best reading since October 2007. Profits are an important source of capital to grow small firms, so this improvement in profit trends is a welcome development.
• Capital Expenditures: Reports of capital spending continue to improve, although the percent of owners characterizing the current period as a good time to expand fell in February and remains historically low. The frequency of reported capital outlays over the past six months rose 2 points to 57 percent, building on the solid gain posted in December. Plans for future expenditures are a little bleaker, however. The percent of owners planning capital outlays in the next three to six months fell 1 point to 23 percent. Eight (8) percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point. The net percent of owners expecting better business conditions in six months was a negative six percent, down 3 points, and 15 percentage points lower than last year’s reading. Not seasonally adjusted, 17 percent expect deterioration (down 1 point), and 21 percent expect improvement (down 1 point).
• Credit Access: Financing remained low on the list of concerns for small-business owners. Only four percent cited financing as their top business problem, compared to 21 percent each citing taxes and unreasonable regulation. Ninety-three percent reported that all their credit needs were met or that they were not interested in borrowing. Thirty-one percent reported all credit needs met, seven percent reported that not all of their credit needs were satisfied (the record low is four percent, reached in 2000) and 50 percent said they did not want a loan, 62 percent if the 12 percent of those who did not answer the question are included, presumably uninterested in borrowing as well. Thirty-two percent of all owners reported borrowing on a regular basis, unchanged from January. A net 8 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), also unchanged. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10 percent (more owners expect that it will be “harder” to arrange financing than easier), 1 point worse than January.
Today’s report is based on the responses of 819 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of February. Download the complete study at http://www.nfib.com/sbetindex.