Wednesday, March 9, 2011

Small business hiring increases slowly

Hiring outlook remains solid; price cutting ending

February posted positive numbers in job growth, according to the National Federation of Independent Business, which reports a modest increase of .4 points in its latest Index of Small-Business Optimism, bringing the monthly reading to 94.5. Most notably, hiring and future plans to hire were solid and hopefully presage a string of steady job creation months this year. While historically weak, these relative gains signal good news for a sector still deeply encumbered by weak sales. Still, only a net 9 percent of small-business owners surveyed expect that business
conditions will improve over the next six months.

“This is not a reading that characterizes a strongly rebounding economy,” said NFIB chief economist Bill Dunkelberg. “But it is the third best reading since the fourth quarter of 2009 when the economy was expanding rapidly. So, it gives us cause for some real optimism. Apparently the future is looking brighter for a few more small-business owners, although much will depend on what Congress does this year.”

The other significant change in February’s reading is the end of a long period of price cutting. This signals a return in the months ahead to increases in average prices as supply adjustments restore pricing power. More small businesses reported that their inventories were “too low” as opposed to “too high,” indicating, also, an end to the inventory adjustment cycle which began when consumers started saving and cut consumption spending by nearly half a trillion dollars. Going forward, there will continue to be upward pressure on prices as demand strengthens. As growth improves, price hikes will stick as owners try to restore profitability.

Some other highlights of February’s Optimism Index include:

-Access to credit still appears to be a low priority for small businesses, with only 4 percent reporting financing as their top business problem. Overall, 92 percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied, and 51 percent said they did not want a loan (12 percent did not answer the question and might be presumed to be uninterested in borrowing as well).

-Reports of positive earnings trends improved, albeit only one point in February, registering a net negative 27 percent. This slight increase shows that far more owners report that earnings are deteriorating quarter on quarter, instead of rising.

-Although consumer spending appears to have risen at a robust 4 percent rate in the fourth quarter, small businesses did not appear to have benefited much from the spending gains. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged at a net negative 11 percent. Unadjusted, 21 percent of all owners reported higher sales (last three months compared to prior three months, unchanged) while 37 percent reported lower sales (up one point).

-Overall, sales trends are not yet supportive of a widespread recovery in the small-business sector. Usually a leader in a recovery, housing starts have remained flat, and can be held accountable for much of the missing new jobs.

The NFIB report is based on the responses of 774 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of February.

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