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Economy in Brief

U.S. Small Business Optimism Improves But Credit Remains Tight With Hiring Cautious
by Tom Moeller November 10, 2009

Small business' optimism recently recovered from its recession low, but the latest readings indicate further, modest upside movement. The National Federation of Independent Business (NFIB) indicated that their small business optimism index rose to 89.1 during October, the third consecutive monthly gain. The latest level was the highest since September '08. 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 percentage of small businesses expecting the economy to improve bounced back after earlier weakness to 11, the highest since May. The percentage which thought that now was a good time to expand the business slipped m/m to a still-improved 7, near the highest level this year. Moreover, the percent reporting higher net-earnings this quarter versus last year held at -40 m/m for the third month, meaning fewer were reporting negative earnings versus last year. It was the highest level since November.

Tight credit conditions continued as 14% of firms indicated that it was harder to get credit. That was near the 1981 high of 15%. Perhaps because of these tight conditions, the recent improvement in business' sentiment has done little, if anything, to improve hiring intentions. The percentage of firms planning to raise employment remained in the net-layoff region and the percentage of firms with one or more job openings held at just 8% during October, 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. Also to the downside, the percentage expecting credit conditions to ease slipped back to the February low.

Pricing conditions eased. The percentage of firms actually raising prices improved to -17 (indicating deflation) and remained just above 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 gave back the prior two months' improvement and fell to a net 6, though that remained up from the March low of zero. Worker compensation fell back to near its recent series' low.ยท The largest, single most important problems seen by business were poor sales (33%), taxes (22%, near the highest level since 2007), government requirements (11%), insurance cost & availability (8%), competition from large businesses (6%) and inflation (2%).

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.

Financial Regulation: Past and Future is the title of yesterday's speech by Fed Governor Daniel K. Tarullo and it can be found here here.

Nat'l Federation of Independent Business October September Y/Y 2008 2007 2006
Small Business Optimism Index (SA, 1986=100) 89.1 88.8 1.8% 89.8 96.7 98.9
  Percent of Firms Expecting Economic Improvement 11 8 -4 -10 -4 -1
  Percent of Firms With One or More Job Openings 8 8 14 18 24 25
  Percent of Firms Raising Avg. Selling Pric1es (Net) -17 -21 15 17 15 20
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