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Despite Hurricanes, Small Business Outlook Remains Firm

Posted on October 19, 2005 by LCT Staff - Also by this author - About the author

WASHINGTON, D.C. – The back-to-back hurricanes that slammed into states on the Gulf of Mexico left massive damage in their wake, but barely scratched the nation's overall small-business sector. According to the September NFIB Small Business Economic Trends survey, the outlook among entrepreneurs remains upbeat for continued solid economic growth.

Job-creation and capital-spending plans remained solid, and the report's Optimism Index stood firm, slipping just nine-tenths of a percentage point to 100 (year 1986 in the survey equaled 100). "The storms caused some uncertainty about the near-term economy, but the impact for the states escaping the storms will hit businesses and consumers when winter weather arrives and brings huge increases in energy bills," said NFIB Chief Economist William Dunkelberg.

The report confirmed that employment increases offset reductions – both at 12%. When seasonal adjustments were made, firms added a net 0.14 employees each, about the same as July and August and a solid performance.

Nearly two-thirds (65%) of small businesses surveyed report capital outlays in the past six months, a four-point improvement over the August reading. Almost half spent for new equipment, 27% bought vehicles and 17% expanded their facilities. Fifteen percent paid for furniture and fixtures; 8% acquired new buildings or land.

The frequency of reported outlays was higher in all categories, the median being about $25,000, modestly larger than August readings and substantial when aggregated over millions of firms. Plans to make capital expenditures in the second half held at 31% of all firms, unaffected by the storms.

Those viewing the current period as a good time to expand facilities fell two points to 19%, and the net share expecting better business conditions in the next six months slid four points. Although weakening, these indicators are normal for long expansion periods and are no cause for concern.

Look for inventory building by small firms in the fourth quarter, Dunkelberg predicted. More firms reduced inventories in September than increased them and more firms reported stocks "too low" versus "too high," an unusual occurrence.

Those boosting sales volumes, quarter-over-quarter, fell a point to a solid net 5%. Seasonally unadjusted, nearly one-third reported higher sales.

Prices are rising and the outlook for energy-cost increases is not favorable. September data spiked seven points to a net 25% who reported higher selling prices (net of those reducing prices), wiping out a seven-point decline in the percent of owners raising prices since June.

The balance between higher compensation costs and higher average selling prices became more favorable for profits. More firms are now passing rising costs on to customers.

Reports of earnings gains remained solid in September, easing only one point to 22%. Of those reporting increases, 59% cited stronger sales, 9% noted higher prices and 5% said labor costs were lower. Thirty-two percent of firms reported lower earnings. Causes cited were weaker sales (31%), materials costs (25%), price reductions (9%) and insurance costs, financing, higher taxes and regulations (3% each). Regular borrowing activity by small businesses dipped four points to 36% in September, but there are no warning signs in the credit outlook. The net share of owners reporting loans harder to get remained historically low, falling two points to a net 3%, close to where it has been for a decade.

Only 2% said their number-one business problem was the cost and availability of credit. Thirty-four percent met all their credit needs while 4% noted difficulty. The net percent of owners expecting credit conditions to ease was little changed at a negative 6% – more owners expect that it will become difficult to arrange financing.

"Overall, the survey indicates that the economy should continue to grow at about the same pace seen all year, solidly more than 3%," Dunkelberg said.

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