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While the Federal Reserve is focused on the problems of the large banks, small business owners are showing some worry about inflation. According to the National Federation of Independent Business' most recent Small Business Economic Trends (SBET) report, the percent of owners reporting higher average selling prices stood at 16 percent, compared with nine percent of all firms polled in September 2007. During the same time period, their plans to raise prices rose from 21 percent in September, to 26 percent of all small business owners polled. The NFIB Index of Small Business Optimism gained 0.2 points in the most recent survey. However, the index has lost 2.4 points since September, before base period adjustment, and it has not been that low since March 2003.

"The historic relationship between inflation and the percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted viability," said NFIB chief economist, William Dunkelberg. More than a quarter of small business owners surveyed reported raising average selling prices, which is up three points from November. In the most recent survey, 12 percent reported lower selling prices, which is unchanged from the previous survey. This price cutting phase has lasted well over a year.

Hiring activity is lower now than at the end of the third quarter of 2007. However, in December, owners increased employment by .18 employees per firm, a fair performance. This is also consistent with a recent ADP National Employment Report that found small businesses accounted for an increase of 66,000 jobs in December.

NFIB's SBET found, seasonally adjusted, that 21 percent of survey participants reported unfilled job openings, which is up two points from November. The average over a 34 year period is 22 percent. In the recent poll, 16 percent said the availability of qualified labor was their top business problem, an increase of three points.

Over the next three months, a seasonally adjusted net 11 percent of owners plan to create new jobs, which is unchanged from October and November, and three points below September. Readings for the past three months have been a point above the 35 year average.

There was some improvement in capital spending. The frequency of capital outlays over the past six months rose six points to 62 percent of all firms, a solid increase. Meanwhile, 47 percent reported spending on new equipment, which is up seven points; 21 percent acquired vehicles, and 16 percent improved or expanded their facilities. Fourteen percent spent money for new fixtures and furniture, and eight percent acquired new buildings or land for expansion.

Nearly a third of all firms polled said they plan to make capital expenditures over the next few months, up three points from November. Fourteen percent of the owners expressed the view that the current period is a good time to expand their business, up a point from November.

Inventory reduction appears to be slowing. Unadjusted, 15 percent of respondents reported inventory gains, and 18 percent reported reductions. In all, 11 percent said they plan to increase stocks while 15 percent plan reductions.

The proportion of owners reporting higher sales increased four points, seasonally adjusted, to a net one percent, reflecting the holiday season. Without seasonal adjustments, 25 percent of all owners reported higher sales, and 26 percent reported lower sales.

Positive sales trends and price increases produced earnings gains for some small firms in December, up five percent compared with November. "Apparently demand was solid and price cutting was restrained," Dunkelberg said.

Of the small retail firms in the survey, 33 percent reported that they had raised average selling prices.

Of the 18 percent of all small business owners that reported higher earnings, 56 percent cited stronger sales, and six percent each credited lower materials costs and higher selling prices.

"Reports of profitability increased," said Dunkelberg, "but further gains will depend on the course of the economy."

Nearly a third of those surveyed reported that all their credit needs were met, compared with seven percent who reported problems obtaining desired financing. The net percent of owners reporting higher rates on their short term loans was one percent, down 14 points from September, a result of the impact of Fed rate cuts on variable priced loans, including lines of credit.

"Some owners now see credit tightening on Main Street in spite of the Fed's expansionary policies," Dunkelberg said. "But rates are falling and there was no change in the net percent of owners reporting credit harder to get, which is our basic indicator of the tightness of monetary policy." NFIB's Small Business Economic Trends is a monthly survey of small business owners' plans and opinions.

Article ID: 546