NFIB Index: Small Businesses Remain Reluctant Recovery Driver
The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for June 2010. The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.
This months report indicates that small business optimism continues to improve. The NFIB index rose 1.6 points to 92.2 recording the highest level of the index since September of 2008.
During the month seven of the 10 index components rose, with job creation and capital expenditure plans recording minuscule increases. The Index rose above the 90 level for the first time in 21 months ending the longest period of negative sentiment in the four decade history of the index.
Though seven of the ten index components rose, small business job creation remains weak. Though the hemorrhaging of job losses has abated employment opportunities with small businesses is not materializing. Employment is a critical component of the Index and is understood as an important sign of economic recovery. During the month small businesses continued to layoff workers registering a negative .5 per respondent. This records the weakest reading for small business employment for the past three months. The NFIB Index corroborates employment trends recently reported by ADP’s National Employment Report and the Department of Labor.
The small business sector is not contributing to private sector employment growth. This is a troubling concern because it is widely understood that small businesses need to be a leading driver for job creation to sustain economic recovery. As we stated last month, historically small businesses have been the major driver in job creation following recessions. The poor job creation reading by the index continues to be a contra indicator of economic recovery. Small business owners are by nature and temperament optimistic and the report indicates that small businesses are still very cautious about allocating capital for jobs to meet improving business conditions.
Highlights of the Report:
- Jobs: 9% percent of respondents reported unfilled job openings. Over the next three months, 7 % plan to reduce employment and 14 % plan to create new jobs.
- Credit: 32% of respondents looking for financing report difficulties in arranging credit. 13% reported loans harder to get than in their last attempt. Overall, 92% of the owners reported all their credit needs met.
- Profits: 17% of respondents reported higher earnings while 49% of respondents reported a decline in profits.
- Prices: 14% reported raising average selling prices, and 28% reported average price reductions.
- Capital Spending: A net 20% of respondents planned to make a capital expenditure within the next three months, 5% planned a facilities expansion and a net 8% expect business conditions to improve over the next six months.
- Sales: 23% of all owners reported higher sales while 38% reported lower sales.
Overview of the Report
The NFIB Optimism Index records that small business sentiment and business conditions are improving but hint that small businesses are not fully participating in a vibrant economic recovery story. The survey indicates that small businesses remain reluctant to create new jobs. Until this improves, demand in the larger economy and stimulation drivers for small business growth will remain weak.
Earnings and capital expenditures tend to correlate in the absence of subdued credit channels. More businesses are required to self fund expansion initiatives and capital expenditures. With earnings down small businesses spending will remain weak creating yet another headwind to market demand for goods and services.
As government stimulus programs come to a close it is crucial that small and mid-sized businesses (SME) become a lead driver in the recovery. Though the NFIB index indicates that business conditions and sentiment is improving the financial health and overall psychology of the sector seems ambivalent to its critical role in economic recovery scenarios.
About the NFIB Index
Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages and Credit Markets. This months survey recorded the responses of 823 NFIB members and concluded May 31.
The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.
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Risk: SME, small business, economic recovery, NFIB
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