Small Business Owners Signal Continued Growth

The National Federation of Independent Business (NFIB) conducts a monthly survey of its small business members which has proved to be a reliable signal of business conditions in the U.S. economy. The July, 2000 survey of 1,300 owners does not provide much comfort to the Federal Reserve Board in its attempts to slow economic activity to dampen inflation. The Index of Small Business Optimism derived from the survey responses rose in July, reversing a brief setback in June which had been hailed as a welcomed sign that slowing was underway. NFIB chief economist William Dunkelberg says that the Index value is now signaling a 3.9% growth rate for the third quarter, still above the Fed's target of about 3.5%.

Some specific highlights from the survey follow:

• More owners expect the economy to deteriorate over the next three months than expect it to improve. However, the ratio was actually less negative than one month earlier, suggesting a brightening outlook. The cause of the surge in optimism was not clear.
• Taxes edged out quality of labor as the most important problem facing small business today. Interestingly, although labor markets remain very tight (33% of firms report "hard-to-fill" job openings, a record-setting level for the 5th straight month), labor costs are not yet considered a major concern by owners.
• However, a net 31% of owners reported raising worker compensation (percent of firms raising minus percent of firms lowering), just 3 points below the record set in May of this year. Dunkelberg notes that the "pervasiveness and persistence of compensation hikes are steadily advancing labor costs. The issue for small firms is whether or not output per hour can keep up, maintaining stable unit labor costs."
• The net percent of firms who reported raising their selling prices in July was 16 percent, down 3 points from June but high enough to boost the average for the calendar year to date to 13%. Compare this to 2% for 1998 and 5% for 1999 and the cause for the Fed's headache becomes clear. Digging a bit deeper in the survey numbers provides some interesting insight: Unadjusted, 24 percent of firms reported increases in average selling prices during the past 3 months while 9 percent reported decreases in average selling prices. Price cuts were reported by 19 percent of firms back in 1991 and 15% of firms as recently as 1998. Consequently, it appears that a major contributor to upward pressure on average selling prices has been from vanishing price cuts.

The bottom line is that inflation remains a worry, but may not yet trigger further interest rate hikes. The July reading on the Consumer Price Index showed only a 0.2% rise in the core index, although the overall index was up 3.6% compared to one year earlier.