NFIB Index: Small Businesses not so Optimistic After Second Quarter 2010

The National Federation of Independent Business (NFIB) reports that its Index of Small Business Optimism, released today, shows that small businesses are still bearish on the American economy as the index dropped 0.9 points in July to 88.1. The index measures future expectations (three to six months) of small business owners based on how they feel about current market conditions, in an indication of economic sentiment. Every month, NFIB surveys a sample of 4,000 of the federation’s members, which include FedEx and Dell to name a few, in 10 different areas of market conditions evaluation. Every month marking the end of the quarter NFIB surveys 11,000 of its members. The index score is based on a point scale with 100 signifying the standard good year, or the economic conditions of 1986. The reported index number, 88.1 this quarter, has been below 93 every month since January 2008 and below 90 for 24 of those months. A spokeswoman for NFIB said a typical recession index is about 90 before it jumps back up to 100. This year is not the same case. The average employment growth index calculated at the end of July was a negative 0.15, meaning that small business owners in the survey pool are firing more than they’re hiring. NFIB said is actually an improvement from recent months where average declines of workers per firm were negative 0.48 in May and negative 0.28 in June. In July, 10% of NFIB members reported having unfilled job openings, 9% plan to increase employment over the next three months and 10% plan to reduce their workforce. The first negative employment growth index was reported in April 2007; thereafter, it remained negative in all quarters except for April 2008 and March 2010. The report’s Capital Spending and Outlook subindex reported that the frequency of reported capital outlays over the past six months fell to 45% of all firms. The percentage of owners planning to make capital expenditures also fell to 18%. Both statistics are only slightly above the 35-year record low of December 2009. 5% of business owners characterized the current period as a good time to expand facilities while a net-negative 15% expect business conditions to improve over the coming months. According to the subindex Sales and Inventory index, a net-negative 16% of those surveyed reported higher nominal sales in the past three months, 18 points better than reported in June 2009. 26% of all owners reported higher sales from the second quarter compared to the first, while 33% reported lower sales. A net-negative 19% of all owners reported gains in inventories, two points better than June but a very weak number. July 2010 is the 28th negative double-digit month in a row for inventory gains, and the 38th negative month in a row. With regard to inflation, the weak economy continued to put downward pressure on prices. Half as many owners reported raising average selling prices as reported price reductions, 12% and 24% respectively. July marks the 20th consecutive month in which more owners reported cutting average selling prices that raising them. The Earnings subindex reported more bad news as previous word of positive trends worsened to a net-negative 33% by the end of July. Owners continued to hold the line on compensation, with 8% reporting reduced worker compensation, and 12% reporting gains. Seasonally adjusted, a net 3% reported raising worker compensation, only 5 points better than February’s record low reading of negative 2%. Write to Christine Ricciardi.

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