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Economy in Brief

U.S. Small Business Optimism Improves Slightly But Hiring Plans Drift To 27-Year Low
by Tom Moeller September 8, 2009

Small business' optimism improved last month as the severe economic weakness of early this year passed. The National Federation of Independent Business (NFIB) indicated, however, that the improvement was not enough to generate an increase in hiring intentions. Their small business optimism index rose to 88.6 during August after the slight July decline. The index remained improved from the lows of this past winter but were down from last year.During the last ten years, there has been an 85% correlation between the level of the NFIB index and the two-quarter change in real GDP.

The improvement in business' sentiment has done little, however, to improve hiring intentions. The percentage of firms with one or more job openings slipped to just 8% during August, the lowest level since 1982. During the last ten years there has been a 74% correlation between the NFIB employment percentage and the six-month change in nonfarm payrolls. Still, the outlook has brightened slightly. The percentage of firms planning to raise employment rose to a net-zero from negative figures as low as -10 in March.

Perhaps this negativism will improve if the economy turns around as expected. The percentage of small businesses expecting the economy to improve bounced off its lows to 10 and that was back near the spring high. The percentage expecting credit conditions to ease, however, remained in its recent low range while the percentage reporting that now is a good time to expand business held stable in its modestly positive range of recent months.

As is normally the case, improvement in firms' capital spending intentions will wait for the economy to strengthen before they rise. During the next 3-6 months, plans for capital spending fell to a new series' low. This weakness in investment continues to reflect poor profits. Forty-percent of firms are reporting lower earnings this quarter versus last, though that is improved from the net -47% in January.

The largest, single most important problems seen by business were poor sales (32%), taxes (18%, lower the recent 22% high), government requirements (11%), insurance cost & availability (9%), competition from large businesses (8%) and inflation (5%).

The percentage of firms actually raising prices (-19) slipped and remained near the record low. During the last ten years there has been a 69% correlation between the six-month change in the producer price index and the level of the NFIB price index.The percentage of firms planning to raise prices improved to a net 8 from the March low of 0. Worker compensation also remained depressed near the series' lows.

About 24 million small businesses exist in the United States. Small business creates 80% of all new jobs in America and the NFIB figures can be found in Haver's SURVEYS database.

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Nat'l Federation of Independent Business August July Y/Y 2008 2007 2006
Small Business Optimism Index (SA, 1986=100) 88.6 86.5 -2.7% 89.8 96.7 98.9
  Percent of Firms With One or More Job Openings 8 9 15 18 24 25
  Percent of Firms Raising Avg. Selling Pric1es (Net) -19 -19 26 17 15 20
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