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Economy in Brief

U.S. Small Business Optimism Falls Again
by  Tom Moeller August 10, 2010

For the second consecutive month, small business optimism fell. The National Federation of Independent Business (NFIB) reported their July small business optimism index fell m/m to 88.1. That's down from the recent high of 92.2 and it has varied around the current level since May of last year. While the latest is improved from the recession low of81.0 in March 2009, it's 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 deteriorated sharply to a negative 15, the lowest level since March of last year. Expectations for sales in the next six months improved modestly but remained the worst since September while the percentage liquidating inventories fell modestly. Improvement in company earnings this quarter slipped again from the highest level in two years.

Hiring plans remained restrained. The percentage of firms with one or more job openings ticked up to 10%, down slightly from its recent high of 11% and down sharply from 25% before the recession. The percentage of firms planning to increase hiring improved to the highest since September 2008. 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 improved modestly as the percentage of firms actually raising prices rose to -11% (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 and fell m/m to 10%. That still remained up from last year's 1% low. Finally, the percentage planning to raise worker compensation improved slightly to 5% versus none at last year's March low.

The most important problems seen by business were poor sales (29%), taxes (21%), government requirements (a sharply increased 15%), insurance cost & availability (8%), competition from large businesses (7%) and inflation (3%).

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.

The statement from today's FOMC meeting can be found here.

Nat'l Federation of Independent Business July June May July '09 2009 2008 2007
Small Business Optimism Index (SA, 1986=100) 88.1 89.0 92.2 86.5 86.7 89.8 96.7
  Percent of Firms Expecting Economy To Improve -15 -6 8 -3 -0 -10 -4
  Percent of Firms With One or More Job Openings 10 9 9 9 9 18 24
  Percent of Firms Reporting That Credit Was Harder To Get 13 13 13 15 14 9 6
  Percent of Firms Raising Avg. Selling Prices (Net) -11 -13 -15 -19 -20 17 15
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