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

Bill Dunkelberg



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. 


Seasonally adjusted, the net percent of owners raising selling prices was a net 3 percent, a very “tame” reading. There are no inflation pressures coming from Main Street. Seasonally adjusted, a net 19 percent plan price hikes (down 3 points). A stronger economy will allow owners to actually realize their plans to raise prices, but so far, reports of actual price hikes suggest that markets will not yet support higher prices. 


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. 


In spite of the rather poor state of government economic policy, the private sector is managing to push ahead. GDP growth in Q4 was initially reported at 2.6 percent, revisions seem to be all positive these days. The data collection is running behind the economy. The revisions to November and December jobs numbers were absurdly large. Why investors pay attention is a mystery, the market just likes to bet on something.

The acceleration in growth follows the Federal Reserve’s termination of the quantitative easing buying sprees. The Fed has taken interest rates down far enough to be more than attractive, but growth prospects (cash flow, profits) are only mediocre. Money isn’t cheap if it can’t be deployed profitably. Buying a trillion dollars of bonds doesn’t produce jobs, the Fed has proved that. And the “wealth effect” from higher stock and bond prices did little to move the economy. Long term rates on Treasury securities will remain low as long as the Fed continues to hoard trillions of dollars in Treasury bonds and the deficit remains low (fewer bonds issued by the Treasury). There is a strong demand for low risk and risk free assets. Treasuries are the best, and so demand for them will keep interest rates low.

While the Administration wants to raise taxes and make it harder to exploit our energy assets (no Keystone, attempts to take Alaska out of the energy business), the private sector has pushed the economy forward, even delivering a nice reduction in energy costs. If gas is $1 lower in cost for a year, the improvement to disposable income is over $100 billion. However, the rapid decline in oil prices will create a lot of instability in employment and capital spending as drilling is down substantially in the U.S. And countries depending on oil revenue to run their governments are in serious trouble.

The average work week in manufacturing is over 40 hours now. Small manufacturers continue to do well with strong job creation plans and plentiful job openings. Apparently the IRS wants to be a job creator as well, asking for over 9,000 new positions in the budget to enforce Obamacare regulations. Their work will count as additional GDP, more workers working on taking something rather than producing a useful service or product. Overall, job creation plans were solid across the board, but especially in Construction, Professional Services, and Manufacturing with the help of strong car sales including the bestselling luxury car defined as $50,000 or higher in price, Ford’s F150 truck.

Currently, it appears that the level of cooperation between Congress and the President remains low, so prospects of addressing the top issues for small business owners are not good. The U.S. is about the only functioning major economy, so it’s good to be here even if prospects aren’t as rosy as they could be with a “normalization” of monetary, fiscal and regulatory policies. The small business sector is contributing more to growth now, but still far below its potential. Policy remains a growth deterrent. 


This survey was conducted in January 2015. A sample of 10,799 small-business owners/members was drawn. One thousand six hundred and sixty-three (1,663) usable responses were received – a response rate of 15 percent. 

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2014, the NFIB retains ownership. All Rights Reserved.

Print page