OCTOBER 2004

Small Business Trends Bode Well for Economy

The August survey of small business owners conducted by the National Federation of Independent Business revealed no sign of weakness in the ongoing economic recovery. The survey was based on 503 respondents in a random sample of NFIB's 600,000 members. Some highlights of the findings compiled by NFIB Chief Economist William Dunkelberg follow.

• The Index of Small Business Optimism for August stood at 102.9 (with 1986=100 as the baseline comparison), the 17th consecutive monthly reading of 100 or more. Dunkelberg considers this a positive sign for continued growth, "at least from the perspective of the small business sector which produces half of the private sector Gross Domestic Product."

• Reports of hard-to-fill job openings were virtually unchanged at a strong level, suggesting the unemployment rate will likely fall in August and September.

• Job creation plans strengthened, nearing the all time record reached in 2000. Over the prior three months, 55% of firms were hiring or attempting to hire, with 76% of those trying to hire reporting few or no qualified applicants.

• The strong uptrend observed earlier in the year in the percent of firms raising prices (a worrisome sign of inflation) has stopped. However, the frequency of reported price hikes remains significantly higher than a year ago.

• Reports of favorable profit trends fell from the July reading, which was the best level since 2000. Profit growth is still doing well, but slowing.

• Overall, Dunkelberg writes of the August survey, "The NFIB data show that job creation is solid and better than that being reported by the Bureau of Labor Statistics payroll survey.... The job situation is far from being so bad that large numbers of people are really discouraged from looking for a job. The 5.4% unemployment rate really means something. It is not a result of worker despair. Overall, 62.5% of the adult population has a job, not the highest in history (the late 1990s expansion recorded higher figures) but among the very best, not worst, statistics. Real wages have risen over the past year, not declined.... Interest rates remain historically low. They may not be able to coax out more record sales for houses and cards or re-financings, but these sectors will remain solid. Energy aside, inflation probably isn't too bad and fears of inflation haven't impacted long term rates... All in all, still a solid economy.