Index shows optimism remains strong among small firms

Small-business optimism advanced a fraction of a point in November, according to the NFIB Education Foundation, indicating that while the economy is slowing from the breakneck pace of recent years, it remains sound.

The foundation's Small Business Optimism Index, a 10-component measure of the economic status, plans and expectations of America's small firms, rose two-tenths of a point to 99.6 in November, according to a Dec. 15 NFIB release. Of the 10 index components, four posted gains and three lost ground, with three indicators unchanged from October readings.

Developments that will shape the economy in the fourth quarter:

The number of firms with hiring plans lost 2 points, falling to 12 percent of all firms 10 points off the record set last December.

Nineteen percent of all firms reported that finding qualified labor is the most important problem they faced. Thirty-five percent a record reported hard-to-fill job openings.

Thirty-two percent reported increasing labor compensation. Nine percent cited labor costs as their No. 1 business concern, a 3-point gain from October.

A net 12 percent of all firms reported raising average selling prices, down 3 points. The average so far this year is more than 13 percent.

Capital spending plans rose a point to 34 percent of all firms. (The record is 41 percent set in December 1998.) Sixty-eight percent reported actual outlays in the last six months, an uptick since October.

The availability of qualified labor was rated the most important problem by 19 percent of small businesses, second only to taxes, according to William Dunkelberg, chief economist at the NFIB Education Foundation. Taxes are the top concern for 23 percent of small businesses.

The labor market remains so tight that a record 35 percent of firms say they have "hard-to-fill" job openings, equaling the August peak. At the same time, hiring plans fell to a seasonal net 12 percent of firms. This is a significant deterioration from December 1999's 22 percent level. Owners now acknowledge that they are unlikely to find workers to fill the open slots.

Small businesses continue to increase employee compensation, with 32 percent of small firms reporting compensation hikes. That level is unchanged from October, and is 2 points below the record, NFIB stated.

It is mainly these labor costs, along with a nudge from high energy costs, which are causing small businesses to raise prices, Dunkelberg added.

A net 26 percent of respondents were planning price hikes. NFIB's analysis indicates that fourth-quarter annualized Consumer Price Index inflation will be nearly 4 percent.

Capital spending and plans for capital spending both ticked up one point in the last month, but they have weakened considerably in the past year. For the year, an average of 34 percent of small firms made capital spending plans the lowest percentage since 1994.

While large businesses have recently been hit with tightening credit standards, these conditions are only showing preliminary signs of affecting small businesses. A net 7 percent of firms surveyed reported that credit was harder to get. While this is the highest reading since 1993 and NFIB stated that it might be a preliminary sign of trouble it still indicates that far fewer small businesses are feeling the credit crunch that is affecting big businesses.

According to Dunkelberg, the tightness in the credit markets may not have severely affected smaller firms because of "credit card" lending to small firms, which provides discretionary lines of credit; lenders' use of computer models instead of human loan officers when extending smaller lines of credit; borrowers' use of personal assets as collateral; the widespread use of "risk-based pricing," whereby lenders charge higher rates but don't say "no" as often; and the strong financial position of small firms resulting from the record economic expansion.