May 11, 2010

NFIB Index Shows Optimism of Small Businesses at 19-Month High

But April rebound is not enough to pull small businesses out of economic slump, economists say

After seven straight quarters of readings below 90, the National Federation of Independent Business' index of small business optimism showed a 3.8-point gain in April, rising to 90.6. While nine of the 10 NFIB index components rose, particularly the outlook for general business conditions and sales, job measures barely moved and capital expenditure plans were flat.

The persistence of NFIB index readings below 90 is unprecedented in its 35-year history. The April index was based on 2,176 respondents in a random sampling of NFIB member firms.

"We were surprised by the March dip--perhaps due to the early Easter?--so this is a welcome rebound," said Ian Shepherdson, chief U.S. economist for High Frequency Economics, in an analyst note. "But the level of the index is still very depressed: If the whole economy were small businesses, this survey suggests it would still be contracting at a 3% rate."

The details showed no significant change in capital spending or hiring intentions, which remained very weak, but expected sales and earnings improved markedly, Shepherdson added. Inventories rose sharply and selling price expectations jumped to -11 from -20.

"That is a big move against a solid prior trend and it may just be a fluke. Credit conditions are very tight still; little change there. Overall, better than March but still very grim," he said.

Similarly, NFIB Chief Economist William Dunkelberg called the gains "a step in the right direction," but not enough to signal that a solid recovery is in place.

"Owners are feeling a little better about things, but not enough to turn them into concrete action," Dunkelberg said in the NFIB release.

The index was below 90 for 22 of the last 25 months, including 18 consecutive months prior to the April reading, Reuters reported. But small business owners continued to liquidate inventories in April and weak sales gave little incentive to rebuild stocks, Reuters said, noting that the weak economy continued to put downward pressure on prices, with more business owners saying they planned to cut prices.

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