Strong 2006 leads to expected steady growth in 2007

Even before 2006 began, small-business owners seemed to sense an increase in economic activity, propelling the NFIB’s index of small-business optimism to 103 in late 2005.

Growth in the first quarter of 2006 accelerated to nearly 6 percent, and the index averaged more than 100 through April, signaling a strong first half. Optimism faded slightly midyear, signaling a slower economy, with the optimism index averaging 98 in the second half. 

More jobs

The most impressive development in the second half of 2006 was the strength of the labor markets. The unemployment rate has held at historically low rates (around 4.5 percent) and the employed percentage of the adult population is at a near-record high level (63.3 percent), exceeded only by readings in the dot-com quarters. 

Nearly one in five owners plans to increase employment at their firms going into the new year, and one in five has one or more job openings they cannot fill. 

“This is a good problem to have,” said NFIB Chief Economist Bill Dunkelberg. “It’s a sign that employment will likely remain strong in 2007. But another characteristic of a tight labor market is higher compensation levels, which may keep edging up, putting pressure on prices or, if firms can’t raise prices, reducing profits.”

The availability of qualified workers is so serious that one in 10 owners reported this as their most important business problem. In the second half of 2006, more than half of the owners reported trying to hire each month, with more than 80 percent of these owners reporting few or no qualified workers for their open positions. As a result, the percentage of owners reporting higher worker compensation has remained high all year. Because minimum wage has increased, businesses of all sizes will be paying more for the same work, with the added costs most likely to be passed on to customers.   

Inflation

On the inflation front, performance has not been as good from the perspective of the Federal Reserve, although business owners are always appreciative of any price increases they can maintain. The percentage of owners raising prices (net of those cutting prices) rose to a high of 26 percent in April. Since then, the frequency of reported price hikes has declined to the mid-teens – good news for the inflation fighters, but not good enough to get the core inflation rate into the Fed’s desired target range of less than 2 percent. 

“In 2003, the inflation rate was 2 percent and the net percent of firms raising selling prices averaged 3 percent, way below recent readings of 17 percent,” Dunkelberg said. “Too many firms are still successfully raising prices to allow the Fed to declare victory. This leads many observers to expect further Fed rate hikes, although we are not in that camp.”

On the horizon

The economy has slowed a bit and spending rates are down so far in 2007, although spending plans remain historically solid and owners are fairly optimistic about economic growth moving into 2007. The numbers show no obvious signs of a recession in the small-business sector.

NFIB’s latest Small Business Economic Trends survey found that 26 percent of small-business owners surveyed expect to make a capital expenditure in the next three to six months. Still, higher-than-usual factors such as gas prices could have an impact on spending habits of consumers and industry-specific businesses.

The cost and availability of employees and insurance, tax-related issues, as well as threats of business mandates continue to be very important issues for small-business owners, and are expected to remain top priorities for NFIB. thus they will continue to be top priorities for NFIB this year.