Small Business Optimism Rebounds

Small business optimism also surged in April, not surprisingly since owners are consumers, too (see previous story). The National Federation of Independent Business released the results of its April member survey (1,393 respondents) in which it found that its index of small business optimism rose to the highest reading since November 2002. However, the survey results portend improvement, not a boom. Highlights include:

• Job creation is still flat, but hiring plans rose a bit from prior months. Consistent with rising unemployment rates, the percent of all firms reporting at least one "hard to fill" job opening fell to 17% in April. This is far below the 35% level achieved in 2000 (a the peak of the tightest labor market in the past thirty years) but still well above the 10% reading in 1991 (during the recession associated with the first war with Iraq). Consumer spending will have to rise before firms need to ramp up hiring plans.

• Firms still have little to no pricing power. Reports of price cutting were widespread in the survey. Inflation is not a problem—deflation might be.

• Capital spending plans rose modestly, and the percent of owners expecting the economy to be "better" in six months rose sharply.

William Dunkelberg, chief economist for NFIB summarizes the economic outlook as follows: "Overall, the economy remains on its pre-war path—slow recovery following a modest downturn with an underbelly of a large capital stock lingering from the last 5 years of the expansion. Hiring will languish until spending growth exceeds the growth in capacity and allows firms to use some of their unused capacity."