January 2015 Report: Small business optimism falls, but still in normal zone

The Small Business Optimism Index fell 2.5 points to 97.9, giving back the December gain that took the Index over 100. Still, the Index indicates that the small business sector is operating in a somewhat “normal” zone. Seven components fell, one was unchanged and 2 rose a bit. Most of the decline was accounted for by expected business conditions (43 percent of the decline), expected real sales (14 percent) and earnings (14 percent). The good news was the increase in the percent of owners reporting hard to fill openings and the drop of only 1 point in the net percent of owners planning job creation from December’s very good number. 

The percent of owners reporting job creation fell 4 percentage points to a net 5 percent of owners, still a solid number. Thirteen percent report increasing employment an average of 3.1 workers while 8 percent reduced their workforce by an average of 3.2 workers. Forty-eight percent reported hiring or trying to hire (down 6 points), but 42 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, unchanged. Twenty-six percent of all owners reported job openings they could not fill in the current period, up 1 point and a very solid reading. The net percent of owners planning to create new jobs gave up 1 point from December’s excellent reading, providing evidence that the December number was not a fluke. A net 14 percent planning to create new jobs is a strong reading. 

After surging in December, the net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months retreated 5 points, falling to a net negative 3 percent. Thirteen percent cited weak sales as their top business problem, up 2 points. Expected real sales volumes posted a 4 point decline, falling to a net 16 percent of owners expecting gains, still a decent reading.

The pace of inventory change shifted to a positive position, with a net 2 percent of all owners reporting growth in inventories (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” improved 2 points to a net negative 1 percent, historically a fairly “satisfied” reading. Not surprisingly, the net percent of owners planning to add to inventory stocks fell 3 points to a net 2 percent. 

Fifty-nine percent reported outlays, down 1 point from December but the second strongest reading since the fourth quarter of 2007. The percent of owners planning capital outlays in the next 3 to 6 months fell 3 points to 26, the second best reading for this expansion but still weak historically. The net percent of owners expecting better business conditions in six months dropped 12 points to a net 0 percent, wiping out the euphoria of November and December. A net 16 percent of all owners expect improved real sales volumes, down 4 points. Still good readings for this expansion, but historically not so hot. 

Earnings trends worsened by 4 percentage points, reaching a net negative 19 percent. Labor costs continue to put pressure on the bottom line but energy prices are down a lot. Two percent reported reduced worker compensation and 25 percent reported raising compensation, yielding a seasonally adjusted net 25 percent reporting higher compensation, unchanged from December. A seasonally adjusted net 12 percent plan to raise compensation in the coming months (down 5 points). 

Four percent of owners reported that all their credit needs were not met, holding at the historic low. Thirty-two percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem (1 point above the record low) compared to 21 percent citing taxes, 22 percent citing regulations and red tape and 13 percent citing weak sales. Eleven percent complained about the availability of qualified labor.

Thirty-three percent of all owners reported borrowing on a regular basis, unchanged from December. The average rate paid on short maturity loans increased 20 basis points to 5.3 percent. Loan demand remained historically weak. The improved optimism and plans to hire and spend have not triggered an increase in owners’ willingness to borrow and make a bet on the future.

The net percent of owners expecting credit conditions to ease in the coming months was negative 5 percent, unchanged from December. Interest rates are low, prospects for putting borrowed money profitably to work seem to be improving but loan demand remains weak among small business owners. The Federal Reserve did all it could to improve the markets’ view of existing cash flows (creating record high financial asset prices) but did little to contribute to better cash flows for most of America’s firms. 

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