PhotoOwners of the businesses responsible for much of the job creation in this country were a more confident lot last month. But there seems to be something of a disconnect.

According to the National Federation of Independent Business (NFIB) its index of small business optimism increased by 2.3 points -- to a final reading of 94.4 in May. While that's the second gain in a row and the second highest reading since the recession started in December 2007, the index does not signal strong economic growth for the sector.

Eight of 10 index components gained momentum, showing some moderation in pessimism about the economy and future sales, but planned job creation fell 1 point and reported job creation stalled after five months of gains.

What about jobs?

“Small-business confidence rising is always a good thing, but it’s tough to be excited by meager growth in an otherwise tepid economy,” said NFIB Chief Economist Bill Dunkelberg. “Washington remains in a state of policy paralysis, and while the stock market sets records, GDP posts mediocre growth.”

The unemployment rate remains in the mid-7s and it is departures from the labor force -- not job creation -- that is contributing to its decline when it does fall, he points out. “It’s nice to see confidence not shrinking, but there isn’t much to hang your hat on in this report,” Dunkelberg added. “We are back to where we were in May 2012. Two good months don’t make a trend, but we can’t have a trend without them, so it’s a start.”

Not much growth

The small business half of GDP is not generating growth beyond population gains. More businesses are being formed than lost, but too many existing firms have not yet started to replace the workers shed during the recession. The optimism index is at its May 2012 level, which is identical to the November 2007 level. Since then, the index has been higher in only three months, each time by less than 2 points.

Owners were asked to identify their top business problem: 24% cited taxes, 23% cited regulations and red tape, 16% cited weak sales and 2% reported financing/access to credit.

Index components

  • Job creation. Jobs creation fell for the first time since November 2012. Small employers reported an average gain of negative 0.04 workers per firm -- essentially zero.
  • Hard to fill job openings. Forty-seven percent of owners hired or tried to hire in the last three months and 38% (81% of those trying to hire or hiring) reported few or no qualified applicants for open positions.
  • Sales. The net percent of all owners reporting higher nominal sales in the past three months compared with the prior three months was unchanged at a negative 4%. While this is the best reading in nearly a year, there are still more firms reporting declines than gains.
  • Earnings and wages. Earnings trends improved 1 point over April’s reading, landing at a negative 22%. Three percent of small employers reduced worker compensation and 20% raised compensation, yielding a net 16% who reported higher worker compensation (up 1 point). A net 9% of owners plan to raise compensation in the coming months.
  • Credit markets. Credit continues to be a non-issue for small employers, only 5% of whom say that all their credit needs were not met in May. This is down 1 point from April and the lowest reading since February 2008.
  • Capital outlays. Owners put a few more dollars into capital expenditures in May; the frequency of reported capital outlays over the past six months rose 1 point to 57 percent in May. However, this is still 8 points below the average spending rate through 2007.
  • Good time to expand. In May, only 8% of owners characterized the current period as a good time to expand. This is up 4 points from a very weak reading in April, but still a poor showing when compared with an average value of 16% pre-recession.
  • Inventories. In May, a net negative 7% of all owners surveyed reported growth in inventories -- one point below that reported in April. Plans to add to inventories gained 3 points, rising to a net 3% of all firms.
  • Inflation. The net percent of owners raising selling prices in May was 2%, down 1 point from April. Sixteen percent of NFIB owners reported reducing their average selling prices in the past three months, an increase of 1 point, and 19% of owners surveyed reported price increases (down 1 point). As for prospective price increases, 17% of small employers plan to raise average prices in the next few months.

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