Small-business optimism ended the year slightly up from November at 93.9, but below the previous 3 mid-year readings of over 94 and 6 points below the pre-recession average, according to the National Federation of Independent Business’ (NFIB’s) latest index. On the positive front, reports of capital spending rose significantly in December, increasing by 9 points from November and job creation among NFIB firms was the best since February 2006. Hopefully, the promising NFIB job creation and capital spending numbers for December forecast a better 2014.

“While there has been no sign that a real recovery has begun, we can be encouraged that the economy is at least crawling forward and not heading in reverse,” said NFIB chief economist Bill Dunkelberg. “Some segments of the economy are showing improvement (manufacturing, construction, professional services), but consumer spending, especially on services (70 percent of consumption), has lagged. Spending on items such as automobiles has certainly increased, however a corresponding rise in hiring has not yet materialized.

Small business optimism ended the year slightly up from November at 93.9, but below the pre-recession average.

A review of the December indicators is as follows:

•    Labor Markets.  Owners increased employment by an average of 0.24 workers in December, the best reading since February 2006. Fourteen percent of the owners reported adding an average of 3.4 workers per firm over the past few months. Offsetting that, 10 percent reduced employment an average of 1.8 workers, producing the seasonally adjusted net gain of 0.24 workers per firm overall.  The “difference” between these two measures is new job creation. 

Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development.  Job openings maintained its solid reading and job creation plans, though slipping a point, held on to the improved levels observed in recent months, anticipating a better job creation figure than reported in November and no deterioration in the unemployment rate.

•    Capital Spending.  The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four percent reported outlays, the highest level since early 2005. The surge in spending, especially on equipment and fixtures and furniture, is certainly welcome and is hopefully not just an end-of-year event for tax or other purposes. This level of spending is more typical of a growing economy. 

•    Sales. The net percent of all owners reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a negative 8 percent. Fourteen percent still cite weak sales as their top business problem, but the lowest since June 2008.

The net percent of owners expecting higher real sales volumes rose a solid 5 points to 8 percent of all owners, restoring the September level of positive expectations. Not seasonally adjusted, 26 percent expect improvement over the next 3 months and 36 percent expect declines. Although restoring the highest reading since early 2012, the gain still leaves sales expectations in a relatively soft position.

•    Inflation. The net percent of owners raising selling prices was a negative 1 percent, down 3 points. There is no evidence that firms are able to raise prices, even though they may wish to as many firms are raising compensation, but not passing those costs on to customers.

Twenty-five percent plan on raising average prices in the next few months, and 3 percent plan reductions. Clearly, reality is preventing firms from implementing the price hikes they would like to have. A net 19 percent plan price hikes, a long way from the net negative 1 percent reporting higher actual prices in recent months. 

•    Earnings and Wages. Earnings trends improved a bit in December, rising 2 points to a net negative 22 percent. Not seasonally adjusted, 16 percent reported profits higher quarter to quarter, and 37 percent reported profits falling. If these were publically traded companies, the stock market indicators would not look good. The economy remains bifurcated, large firms doing fairly well, small businesses showing little growth or improvement.  

•    Credit Markets. Four percent of the owners reported that all their credit needs were not met, unchanged and an historic low.  Thirty-two percent reported all credit needs met, and a record high 55 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 23 percent citing taxes, 20 percent citing regulations and red tape and 14 percent citing weak sales.  

Today’s report is based on the responses of 635 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of December. Download the complete study at www.nfib.com/sbetindex.