The National Federation of Independent Business Index of Small Business Optimism gained 0.7 points in August, rising to 88.8.
Most of the improvement was accounted for by gains in expected real sales and expectations for business conditions six months out, the two components that lowered the index in July. But despite their improvements, both measures are still in recession territory.
Small business owners are expecting sub-par growth in the second half of 2010, said NFIB chief economist Bill Dunkelberg in a statement. Consumers are pessimistic, business owners are pessimistic and Washingtons leadership has been unable to inspire any confidence in the future.
Average employment growth per firm has been negative since April of 2007 and remained negative for 10 of the 12 following quarterly (first month in each quarter) readings. August brought no improvement, with reported job loss averaging negative 0.3 employees per firm (seasonally adjusted).
Eleven percent (seasonally adjusted) reported unfilled job openings, up one point from July but historically very weak. Over the next three months, 8 percent plan to increase employment (down one point), and 13 percent plan to reduce their workforce (up three points), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, down one point from July but positive for the 4th time in the last 22 months.
The frequency of reported capital outlays over the past six months fell one point to 44 percent of all firms, again hitting the 35-year record low. Of those making expenditures, 29 percent reported spending on new equipment (down one point), 14 percent acquired vehicles (unchanged) and 11 percent improved or expanded facilities (unchanged). Two percent acquired new buildings or land for expansion (down one point), and 7 percent spent money for new fixtures and furniture (down two points). Basically, expenditures are weak across the board.
Seventy-three percent of all owners said the current period was not a good time to expand. Of those, 69 percent cited the poor economy as the reason, but 18 percent blamed the political environment, unchanged from July.
The net proportion of all owners (seasonally adjusted) reporting higher nominal sales in the past three months was unchanged from July at a net-negative 16 percent, 18 points better than June 2009 but indicative of very weak customer activity. Unadjusted, 25 percent of all owners reported higher sales (last three months compared to prior three months, down one point) while 33 percent reported lower sales (unchanged). Widespread price cutting continued to contribute to reports of lower nominal sales.
The net proportion of owners expecting higher real sales gained four points over July, rising to a net 0 percent of all owners (seasonally adjusted) dismal even with a four point improvement. Not seasonally adjusted, 28 percent expect improvement over the next 3 months, 29 percent expect declines.
Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. A net-negative 15 percent of all owners reported gains in inventories (more firms cut stocks than added to them, seasonally adjusted), four points better than July but still very weak. August 2010, is the 29th negative double digit month in a row and the 39th negative month in a row for inventory reductions. Unadjusted, 10 percent reported gains in inventory stocks (unchanged), but 24 percent reported inventory reductions (down one point).
The weak economy continued to put downward pressure on prices. Fourteen percent of the owners (up two points) reported average selling prices increases, and 23 percent reported average price reductions (down one point). Seasonally adjusted, the net percent of owners raising prices was a negative 8 percent, a three point increase from July. August is the 21st consecutive month in which more owners reported cutting average selling prices that raising them.
Reports of positive profit trends improved three points in August, registering a net-negative 30 percent, 26 points worse than the best expansion reading reached in 2005.
Profits are essential for the support of capital spending and expansion, said Dunkelberg. Until earnings improve, small business owners are unlikely to invest in new hires or new equipment.
Not seasonally adjusted, 18 percent reported profits higher (unchanged), but 42 percent reported profits falling, a 3 point improvement from July.
A net 12 percent reported loans were harder to get than in their last attempt, one point lower than July. Overall, 91 percent of the owners reported all their credit needs met or they did not want to borrow, unchanged from July. Only 4 percent cited financing as their top business problem.
What businesses need are customers, giving them a reason to hire and make capital expenditures and then they may have the need to borrow to support those activities, said Dunkelberg. Washington doesnt seem to understand this. Their proposals to improve the economy typically focus on easing credit conditions or giving businesses incentives to spend. These policies are unlikely to help most small businesses whose main problems remain poor sales and uncertainty over the economy.
