The National Federation of Independent Business is seeing the level of small business optimism beginning to flatten out.

Bill Dunkelberg

The NFIB’s Small Business Optimism Index rose only 0.1 points in January, the group reported, settling at 93.9. While the increase marks five consecutive months of improvement, the readings from January and February 2011 were actually higher -- indicating no net gain for the calendar year. Historically, the NFIB pointed out, optimism remains at recession levels. While small business owners appeared less pessimistic about the outlook for business conditions and real sales growth, that optimism did not materialize in hiring or increased inventories plans.

“The most positive statement that can be made about January’s reading is that the index did not go down; a change of 0.1 points is essentially no change and it is hardly indicative of a surge in economic activity,” said NFIB chief economist Bill Dunkelberg in a statement. “Nothing happened last month that would significantly improve the small business outlook; Washington is at a stalemate. The index remains below its level a year ago of 94.1 which means that no progress was made in 2011. Congress has failed to pass a budget for over 1,000 days, and without discipline on spending or any budgetary priorities, there is no path to fiscal sanity in Washington. U.S. debt is now larger than our GDP, and headed in the wrong direction. This does not make for a comforting future, a fact reflected by low consumer and small-business owner optimism.”

The last 12 months of the NFIB’s index suggests that for the 2,155 small business owners surveyed, 2011 was a “flat” year. While the index is trending in a positive direction, January 2012’s survey indicates that the economy will continue to crawl along at a slow and weak pace.

NFIB reports of job growth improved (0.15) from December, but only to net zero (0) new workers per firm. The Bureau of Labor Statistics report issued on February 3 indicated relatively strong job creation for January. However, the NFIB’s data suggests that there will be some downward revision in the BLS numbers, especially in light of the adjustments in the Household Survey that suggested a huge number of adults left the labor force.

Seasonally adjusted, 11 percent of small business owners added an average of three workers per firm over the past few months, while 11 percent reduced employment an average of 2.9 workers per firm. The remaining 78 percent of owners made no net change in employment. Owners reporting reductions in employment remained relatively low, suggesting that firms are through cyclically adjusting their employment.

Reports of workforce reductions are at their lowest level since October 2007. Forty-one percent of owners indicated they have hired or tried to hire workers in the past three months, but 31 percent reported few or no qualified applicants for the positions. The increase in the percent of owners with hard to fill job openings indicates that job markets are tightening somewhere, and correctly anticipated a decline in the unemployment rate.

The frequency of small businesses that reported making capital expenditures over the past six months fell one percentage point, declining to 55 percent, but still retaining the solid gain posted in December. The record low of 44 percent was reached most recently in August 2010.

Of those small businesses making expenditures, 38 percent reported spending on new equipment (down 4 points), 20 percent acquired vehicles (unchanged), and 13 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (up 1 point) and 11 percent spent money for new fixtures and furniture (down 2 points).

While the spending picture has improved, it still falls short of “normal”. The percentage of owners planning capital outlays in the next three to six months held at 24 percent; this is the highest reading in years, but still 10 points lower than those typically seen in an expanding economy.

Reports of positive earnings trends were 2 points worse in January at a net negative 24 percent of all owners taking back part of the 6 point improvement registered in December. Unable to raise prices and with weak sales growth, small businesses are unable to restore profitability. Four percent of the small business owners surveyed reported reduced worker compensation, while 14 percent reported raising compensation, yielding a seasonally adjusted net 12 percent reporting higher worker compensation, the highest reading since November 2008.

The net percent of small business owners expecting better business conditions in six months was a negative 3 percent, 5 points better than December but still 13 percentage points below last year’s reading. Not seasonally adjusted, 18 percent expect deterioration (down 4 points), and 22 percent expect improvement (up 7 points). A net 10 percent of all owners expect improved real sales volumes, up 1 point and the strongest reading since the beginning of the year. Twenty-two percent report “poor sales” as their top business problem, down 1 point, but still the top business problem reported.

Increasing 3 points over December, a net negative 7 percent of all owners (seasonally adjusted) reported growth in their inventories. January marks 56 consecutive months during which reported inventory reductions have outnumbered reported increases. Unadjusted, 11 percent reported growth in inventory stocks (unchanged) and 22 percent reported inventory reductions (up 1 point).

More owners reported weaker sales quarter on quarter than improvements, so demand can be met by reducing inventories on hand. Overall, it appears that small-business owners have reduced inventories to acceptable levels given the outlook for sales growth. Without improved sales, there is little motivation to order new inventory stocks. Plans to add to inventories dropped 5 points, arriving at a disappointing net negative 3 percent of all firms (seasonally adjusted). This drop is notable because December’s reading was the best in 18 months.

Eighteen percent of the NFIB owners reported raising their average selling prices in the past three months (up 1 point), and 17 percent reported price reductions (down 1 point). Seasonally adjusted, the net percent raising selling prices was -1 percent, down a point from December. The frequency of price increases was highly concentrated in the Wholesale (a net 14 percent raised prices) and Retail (net 4 percent raised).

Those cutting prices exceeded those raising prices by 14 percentage points in Construction and Agriculture, largely a result of seasonal impact. Twenty-three (23) percent of owners plan to raise average prices in the next few months, while 3 percent plan reductions. Seasonally adjusted, a net 17 percent plan price hikes up 3 points. With some evidence that spending has picked up, some of these price hikes might stick.