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Data Shows Small Businesses More Optimistic with Planned Hiring and Increases in Pricing

Source: WSJ - Kathleen Madigan

Posted on 08 Mar 2011

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According to data released today by the National Federation of Independent Business (NFIB), small business owners were more optimistic in February, with firms reporting good news on the hiring front and more planning to raise their selling prices.

The NFIB's small business optimism index last month increased 0.4 point from January, to 94.5. The subindex of expected business conditions in six months slipped one percentage point to 9% although small-business owners expected an improvement in demand, with the expected sales index up one percentage point to 14%.

Hiring also made gains. The February employment subindex increased two points to 5%. The average employment change per firm was reported to be 0.17 employee over the past three months, up from a negative 0.15 reported in January.

“For the first time in 3 years, owners reported solid job creation, and plans to create more new jobs improved again (although historically still weak),” the report said.

Higher optimism about future business conditions and sales is prompting small firms to try and pass through price increases.

The report said the seasonally adjusted net percentage of owners reporting higher selling prices increased to 5% in February from a negative 4% in January. It was the first positive reading in more than two years.

“With an improving economy, more and more of these hikes will “stick’,” the NFIB said.

If so, the U.S. Federal Reserve may be facing an acceleration in inflation sooner than officials now expect. The Fed’s policy forecast, released last week, expected consumer inflation to rise to about 1.5% during 2011.

The NFIB also addressed concerns raised by some followers of the index that responses from construction firms may be skewing the overall index. The building sector collapsed after the housing bust. In January, 432 of the 2,144 respondents were in the construction industry.

The NFIB reconstructed the January index without building firms. The result was a reading of 95.2 versus the top-line 94.1.

The report said that the index and its 10 components are marginally “better” without any construction firms, but “it is clear that the factors that have kept the index readings at recession levels are common to all owners, not just those in the struggling construction industry.”