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Economy in Brief

U.S. Small Business Grow More Wary
by Tom Moeller July 13, 2010

Small business optimism fell last month after two months of improvement. The National Federation of Independent Business (NFIB) reported their June small business optimism index declined m/m to 89.0 from the recent high of 92.2. The decline highlighted the notion that, while up from the recession low, optimism remained far lower than its 2004 peak. 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 firms expecting the economy to improve fell to a negative 6 and that mostly reversed the prior two months' improvement. Expectations for sales in the next six months fell to their worst since September while the percentage liquidating  inventories rose to 21, its highest since January. Improvement in company earnings this quarter slipped from the highest level in two years. Most other components also fell including expectations for the economy.

Hiring plans remained restrained. The percentage of firms with one or more job openings was only 9%, down from its recent high of 11%. The percentage of firms planning to increase hiring continued the sideways movement of the last year. During the last ten years there has been a 74% correlation between the NFIB employment index and the six-month change in nonfarm payrolls.

Pricing activity also remained restrained. The percentage of firms actually raising prices fell to -13% (indicating deflation). During the last ten years there has been a 51% correlation between the six-month change in the producer price index and the level of the NFIB price index. Also, the percentage of firms planning to raise prices reversed most of the improvement during the last two months but remained up from last year's low. Finally, the percentage planning to raise worker compensation fell back to 3% versus none at last year's March low.

The most important problems seen by business were poor sales (30%), taxes (20%), government requirements (a sharply increased 15%), insurance cost & availability (6%), competition from large businesses (a reduced 5%) and inflation (4%).

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.

Nat'l Federation of Independent Business June May April June '09 2009 2008 2007
Small Business Optimism Index (SA, 1986=100) 89.0 92.2 90.6 87.8 86.7 89.8 96.7
Percent of Firms Expecting Economy To Improve -6 8 0 7 -0 -10 -4
Percent of Firms With One or More Job Openings 9 9 11 11 9 18 24
Percent of Firms Reporting That Credit Was Harder To Get 13 13 14 14 14 9 6
Percent of Firms Raising Avg. Selling Prices (Net) -13 -15 -11 -17 -20 17 15
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