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Small Business Optimism Improves in Anticipation of Better Economic Outlook

July 20, 2020, 07:20 AM
Filed Under: Economy

The Small Business Optimism Index increased 6.2 points in June to 100.6 with eight of the 10 components improving and two declining. Owners anticipate improving sales as the economy continues to re-open with sales expectations rebounding to a net 13 percent after April’s lowest reading in survey history (a net negative 42 percent). Small business owners continue to be optimistic about future business conditions and indicate they expect the recession to be short-lived.

“Small businesses are navigating the various federal and state policies in order to reopen their business and they are doing their best to adjust their business decisions accordingly,” said NFIB Chief Economist Bill Dunkelberg. “We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels.”

Other key findings from the survey include:

  • The NFIB Uncertainty Index decreased one point in June to 81.
  • Earnings trends over the past 3 months declined to a net negative 35 percent, the lowest reading since March 2010.
  • The percent of owners who think now is a good time to expand improved 8 points to 13 percent of owners.
  • Job creation plans increased 8 points to a net 16 percent.

Down from May, 48 percent of owners reported capital outlays in the next six months, the lowest level since December 2010. Of those making expenditures, 32 percent reported spending on new equipment (down 3 points), 18 percent acquired vehicles (down 2 points) and 14 percent improved or expanded facilities. Five percent acquired new buildings or land for expansion and 9 percent spent money for new fixtures and furniture.

Twenty-two percent plan capital outlays in the next few months, up 2 points from May. Plans are trending up but remain at recession levels.

A net negative 31 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 12 points from May. Re-opening the economy has been slow, especially in the services sector including travel, entertainment, salons, and other more public-facing businesses.

The net percent of owners expecting higher real sales volumes improved 37 points to a net 13 percent of owners. The historic 61-point drop over March and April has been followed by a 55-point increase over the past 2 months as owners are expecting higher sales with business re-openings.

Also improving from May, the net percent of owners reporting inventory increases went up 1 point to a net negative 14 percent. Inventory levels are surprisingly low. Owners had little time to manage their inventory position after the pandemic and had a drop in customers unexpectedly and quickly. Once states began to re-open, some owners had trouble getting some of the items for their customers.

The net percent of owners planning to expand inventory holdings increased from May by 5 points to a net 7 percent as sales improved. This is one of the highest readings historically and good news for growth.

Seasonally adjusted, the net percent of owners raising average selling prices rose 9 points to a net negative 5 percent. Unadjusted, 18 percent reported lower average selling prices and 15 percent reported higher average prices. Price hikes were the most frequent in retail (12 percent higher, 23 percent lower, and wholesale (18 percent higher, 28 percent lower). A net 12 percent (seasonally adjusted) plan price hikes, up 3 points from May.

A net 14 percent (seasonally adjusted) reported raising compensation, well below the 36 percent reading in February prior to the pandemic. A net 13 percent plan to do so in the coming months, up 3 points from May. Eight percent of owners cited labor costs as their top business problem.

Nineteen percent of owners selected “finding qualified labor” as their top business problem. The coronavirus disruption for millions of workers did not change the skills of the existing workforce. Consequently, there was no improvement in firms’ ability to find the skills required to fill their open positions.

The frequency of reports of positive profit trends fell 9 points to a net negative 35 percent reporting quarter on quarter profit improvements, the lowest reading since March 2010. Among the owners reporting weaker profits, 61 percent blamed weak sales, 9 percent blamed usual seasonal change, 5 percent cited price changes, 3 percent cited labor costs, and 1 percent cited material costs. For the owners reporting higher profits, 65 percent credited sales volumes and 19 percent credited usual seasonal change.

Unchanged from May, 3 percent of owners reported that all their borrowing needs were not satisfied. Thirty-four percent reported all their credit needs were met and 54 percent said they were not interested in a loan. A net 3 percent reported their last loan was harder to get than in previous attempts. Overall, access to capital is not a serious problem, likely due to the popularity of the Paycheck Protection Program that most small business employers have accessed.

One percent reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was negative 9 percent, up 4 points. The Federal Reserve policies have driven interest rates to historically low levels.

Click here to view the NFIB Small Business Economic Trends Survey.

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