PhotoYou couldn't quite call it enthusiasm, but there was a slight increase in optimism among small business operators heading into the holiday season.

According to the National Federation of Independent Business's (NFIB), its monthly Index was up 0.9 in November, for a total reading of 92.5. Employment is a major concern among NFIB respondents. Small-business employment is better at the end of this year than last year, as the NFIB indicators anticipated, but not enough to restore the 2007 level hiring. However, uncertainty remains throughout the sector, as it anticipates increased taxes, regulations and health-care costs.

Angst and uncertainty

“The year is not ending on a high note in the small-business sector of the economy,” said NFIB chief economist Bill Dunkelberg. “The ‘bifurcation’ continues with the stock market hitting record high levels, but the small-business sector is showing little growth beyond that driven by population growth. There is also a hint that employers are getting an inkling of what Obamacare might mean for labor costs, concern about the cost and availability of insurance bumped up 3 percentage points after a long period of no real change.

“Small-business owners who provide health insurance may soon find that their plans ‘unacceptable’ to Obamacare and be obliged to either pay more for the coverage or abandon it and pay the benefit in cash,” he noted, adding, “This will be a major source of angst and uncertainty in 2014.”

November in depth

  • Job Creation. NFIB owners increased employment by an average of 0.05 workers per firm in November (seasonally adjusted) -- half the October figure, but positive. Seasonally adjusted, 14% of the owners (up 2 points) reported adding an average of 3.7 workers per firm over the past few months. Offsetting that, 12% reduced employment (up 3 points) an average of 3.4 workers, producing the seasonally adjusted gain of 0.05 workers per firm overall. The remaining 74% of owners made no net change in employment. Fifty-one percent of the owners hired or tried to hire in the last three months and 44% reported few or no qualified applicants for open positions.
  • Hard to Fill Job Openings. Twenty-three percent of all owners reported job openings they could not fill in the current period (up 2 points), a positive signal for the unemployment rate and the highest reading since January, 2008. Thirteen percent reported using temporary workers, down 2 points from October.
  • Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months versus the prior 3 months was unchanged at a negative 8%. Fifteen percent still cite weak sales as their top business problem. The net percent of owners expecting higher real sales volumes rose 1 point to 3% of all owners after falling 6 points in October (seasonally adjusted), a weak showing. Not much help for hiring or inventory investment in those numbers.
  • Earnings and Wages. Earnings trends deteriorated a bit in November, falling to a net negative 24%. If these were publically traded companies, the stock indices would not look good. The economy remains bifurcated, large firms doing fairly well, small businesses showing little growth or improvement. Three percent reported reduced worker compensation and 16% reported raising compensation, yielding a seasonally adjusted net 14% reporting higher worker compensation (down 2 points). A net seasonally adjusted 14% plan to raise compensation in the coming months, up 4 points. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery. With a net 14% raising compensation but a net 2% raising selling prices, profits will continue to be under pressure.
  • Credit Markets. Credit continues to be a non-issue for small employers with just 4% of the owners reporting that all their credit needs were not met -- down 2 points. Thirty-two percent reported all credit needs met, and 52% explicitly said they did not want a loan. Twenty-nine percent of all owners reported borrowing on a regular basis, up 1 point but a near-record low. The average rate paid on short maturity loans was steady at 5.4%.
  • Capital Outlays. The frequency of reported capital outlays over the past 6 months fell 2 points to 55%, stuck in the “mid-50s” since recovering in 2012 from the lows of 45 reached in late 2009 and early 2010. The small business sector appears to still be in “maintenance mode”, with little expansion planned in the future. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point -- to 24%. Capital spending is at its highest point since early 2008 but has been stuck well below normal levels for several years, threatening the improvements in productivity needed to raise real wages.
  • Inventories. The pace of inventory reduction continued, with a net negative 7% of all owners reporting growth in inventories (seasonally adjusted), 1 point worse than October. The negative outlook for the economy and real sales prospects adversely affected inventory satisfaction. The net percent of owners planning to add to inventory stocks was a net 0% -- (up 1 point), no new orders for inventory when stocks are excessive compared to expected sales.
  • Inflation. Seasonally adjusted, the net percent of owners raising selling prices was 2% -- down 3 points. Seasonally adjusted, a net 19% plan price hikes, up 1 point. Not much of this is likely to “stick” if owners are correctly forecasting the future of the economy over the next six months.

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