WASHINGTON (MNI) – The following is the text of the National
Federation of Independent Business’ monthly Small Business Optimism
index published Tuesday:

Dropping just a tenth-of-a-point in the month of May, the Nation
Federation of Independent Business (NFIB) Index of Small Business
Optimism came in at 94.4. A reading of 94.4 is historically low and
consistent with the sub-par performance of GDP and employment growth.
The individual indicators were mixed, with expected sales in a three
month decline. However, some employment components improved and profit
trends remained relatively stable after its sharp gain in April.

“In the last year, small-business optimism has limped along, and
today the sector is no better off than it was just over a year ago,”
said NFIB Chief Economist William Dunkelberg. “The lack of progress is
discouraging, producing no signs that economic activity will pick up
this year at all. The calculus of spending decisions requires an
estimate of future sales, tax rates, interest rates and credit
availability, labor costs, health-care costs, regulatory compliance
costs, all of which are very uncertain. Most of this uncertainty is the
result of what is happening-and not happening-in Washington. Investments
in jobs or plant and equipment are not the priority while people are
still bracing for the worst.”

Levels of hiring and spending remained depressed in May, as did
plans to do more in the near future. Expectations for increasing future
sales continued to be weak, far below readings recorded in any other
recovery period since 1973. Sixty (60) percent of those surveyed said
now is a bad time to expand their businesses; one in four of those
owners cited political uncertainty as the main reason, second only to
concerns about a weak economy.

However, prospective labor market indicators posted gains that
built upon those reached in April. There was gradual improvement in
reports of collecting and paying bills on time, and trade credit
availability improved. Compensation continued to show some strength, and
price hikes moderated.

Some other highlights of May’s Optimism Index include:

– Business Conditions: The future remains uncertain for
small-business owners; many tentative to expand their businesses or hire
more workers in the coming months. Only seven percent (seasonally
adjusted) characterized the current period as a good time to expand
facilities-this reading is unchanged from the previous month. The net
percent of owners expecting better business conditions in six months was
a negative two percent (a 3 point improvement). However, more owners
still expect the economy to deteriorate further than those who
anticipate improvement. A net two percent of all owners expect improved
real sales volumes, down 4 points, the third monthly decline in a row.
Twenty (20) percent reported that “poor sales” are their top business
problem, up 1 point from April. Overall, the outlook is not conducive
for new spending or hiring.

– Capital Expenditures: Based on data about capital expenditures,
it appears that small-business spending is more for maintenance than for
expansion. The frequency of reported capital outlays over the past six
months rose 1 point to 55 percent, 11 points above the historic low last
reached in August 2010, but still below readings from the first half of
2008. For historical context, an average of 60 percent of firm owners
reported making capital outlays on 2007. Of those making expenditures in
May, 37 percent reported spending on new equipment (down 2 points), 24
percent acquired vehicles (up 2 points), and 14 percent improved or
expanded facilities (up 1 point). Seven percent acquired new buildings
or land for expansion (up 1 point) and 13 percent spent money for new
fixtures and furniture (unchanged). Overall, the sector exhibited small
and incremental improvements in spending. The percent of owners planning
capital outlays in the next three to six months dropped 1 point to 24

– Job Creation: The change in employment per firm seasonally
adjusted was a wash – coming in at a net “0”. Seasonally adjusted, 10
percent of the owners added an average of 2.6 workers per firm over the
past few months, and 15 percent reduced employment an average of 2.1.
The remaining 75 percent of owners made no net change in employment.
Fifty-one (51) percent of the owners hired or tried to hire in the last
three months and 37 percent (73 percent of those trying to hire or
hiring) reported few or no qualified applicants for positions. The
figures suggest that job creation was very weak, and finding workers for
open positions is proving a challenge for some owners. The percent of
owners reporting hard to fill job openings rose 3 points to 20 percent,
the highest reading since June 2008, indicating that labor markets are
tightening-either because labor demand is quietly rising or potential
workers continue to leave the workforce. Seasonally adjusted, the net
percent of owners planning to create new jobs rose 1 point to six
percent, confirming the 5 point jump recorded in April. Overall, there
was little improvement in the numbers to suggest that job creation will
enjoy any precipitous increase in the near future.

– Sales: It appears that sales are improving modestly in the
small-business sector. The net percent of all owners (seasonally
adjusted) reporting higher nominal sales over the past three months
dropped 2 points, falling to two percent, the second highest reading in
60 months (the highest was April’s reading of 4 percent). The low for
the cycle (July 2009) was a net negative 34 percent reporting quarter
over quarter gains, making the last few monthly readings a reason to be
encouraged. Seasonally unadjusted, 25 percent of all owners reported
higher sales (last three months compared to prior three months,
unchanged) while 27 percent reported lower sales (down 3 points).
Spending on services has shown little life, it remains weak overall,
handicapping a sector of the economy that is labor intensive and is the
source of many potential new jobs. The net percent of owners expecting
higher real sales in the coming months lost 4 points, falling to a net 2
percent of all owners (seasonally adjusted). Not seasonally adjusted, 36
percent expect improvement over the next three months (down 5 points)
and 21 percent expect declines (up 2 points).

Optimism Components : Net % Change


Today’s report is based on the responses of 681 randomly sampled
small businesses in NFIB’s membership, surveyed throughout the month of

** MNI Washington Bureau: 202-371-2121 **