Industry Crib Sheet: Small Business Confidence Brightens
April 14, 2014
Small business owners felt more confident in March, reversing some February pessimism, and expect more sales while raising inventory.
The latest Small Business Optimism Index by the National Federation of Independent Business rose 2 points to 93.4, after a 2.7-point drop the prior month. Although six of the index's 10 components improved, two crucial ones -- expectations for the economy and earnings trends -- remained in deep negative territory.
With a pre-recession reference of 100, Bill Dunkelberg, NFIB's chief economist, commented, "While the Index still can't seem to get above 95, we can be encouraged that the economy is at least crawling forward and not heading in reverse."
Among the encouraging signs is that the index for real sales volume jumped 9 percent to a net 12 percent of owners. This figure means owners who expect better sales outnumbered those who don't expect sales improvements. Along with better sales expectations, the net number of all small business owners that reported higher nominal sales in the past three months improved 2 points to -6 percent.
Small businesses found some success in whittling down old inventories, and they see a need to replenish with new stock, shedding some inventory reservations shown in February. A net -6 percent of owners reported inventory growth, which was 4 points lower than February. The net amount of owners that saw their current inventory levels as "too low" rose 4 points to 0 percent, and the net number of owners planning to add inventory stocks increased 6 points to 1 percent.
Conservative business spending continued to pervade in March, however. After ticking up 1 percent in February, the net number of owners planning capital outlays in the next three to six months ticked back down a point in March to 24 percent. Fifty-six percent of owners reported making outlays in March, down 1 point from the prior month. The outlays were characterized as "maintenance mode" spending by NFIB.
Inflationary pressures appear to be entering the market, which may help improve earnings trends mired at -24 percent. While this was a 3 point improvement over February, rising labor costs, indicated by a net 23 percent of owners reporting higher worker compensation, could eat into profits.
More than one in every five owners (23 percent) reported price increases, and a seasonally adjusted net 9 percent of owners raised their prices. An equal percentage of owners plan to raise average prices in the next few months, and only 3 percent plan to lower prices.
Hiring continued to trail fixed asset investments in small business spending plans, and filling positions remained challenging for businesses. While employment expanded in March for the sixth straight month, 41 percent reported few or no qualified applicants for open jobs in the past three months, and 22 percent could not fill positions last month. Job creation plans have dwindled from net 12 percent in January to net 5 percent.
Both taxes and government pressures overtook poor sales as responses to the single-most important problem for small businesses.
After a strong January, expenditures in metal-cutting tools, which serve as a proxy for business and production activity among machine shops and contract manufacturers, continued nearly apace in February.
Total cutting tool consumption totaled $157 million for the month, just a slight 1.2 percent drop compared with the first month of the year ($158 million). February's figure was down 6.8 percent from the same period a year earlier, however.
The totals for the first two months of the year suggest that machine shops kept busy through most of the winter, even when extreme weather conditions suppressed industrial production activity across the nation. "The trend is certainly on an upward climb as incoming orders have indicated a strong finish for the first quarter of the calendar year," Tom Haag, president of the U.S. Cutting Tool Institute, said about the February data.
Another encouraging sign was that the more-or-less-steady February figure comes after four months of volatility in the cutting tool market. Further suggesting machining activity and manufacturing in general have stabilized and are primed for expansion in the warmer months, the nation's industrial production, of which the manufacturing sector is the dominant contributor, rebounded sharply in February, as did factory orders.
New information from the Department of Energy shows that natural gas served as the fuel source at half of all power plant capacity additions in 2013.
While the 6,861 megawatts (MW) in new natural gas power plant capacity were considerably less than 2012's 9,210 MW expansion, the figure still more than doubled the capacity expansion of the next biggest energy source, solar power. The natural gas capacity additions came from an almost-even split between combustion turbine peaker plants and combined-cycle plants.
Solar photovoltaic (PV) operators added 2,193 MW of electricity-generating capacity last year, which was a nearly 22 percent jump over 2012, continuing solar's steady rise in the energy market. Helped by falling technology costs and state renewable portfolio standards, as well as federal tax credits, the solar thermal industry opened large-scale power plants in Arizona and California totaling 766 MW, which raised the country's total solar capacity by more than twofold.
In contrast, just 1,507 MW of coal-fired power plant capacity went on line in 2013. Two plants accounted for all of that capacity; one was a conventional steam coal plant in Texas, and the other was an integrated gasification combined-cycle plant in Indiana.
Wind capacity additions (1,032 MW) dropped sharply in 2013 to less than one-tenth of the capacity added in 2012 (12,885 MW). This was a widely expected result of the rush to complete wind projects in 2012 to qualify for the federal production tax credit.
Unlike previous versions of the tax credit, the one-year extension for 2013 allowed developers to claim the tax credit for projects that began construction in 2013 even if the project will be completed in a later year. Consequently, developers were not as pressured to complete wind projects by the end of 2013. At this time, there have not been any subsequent extensions of the tax credit.
Nearly half of all power plant capacity that went onstream in 2013 did so in California, at 47 percent. The 6,395 MW of new generation were primarily natural gas and solar based, with the latter driven by the state's renewable portfolio standard requiring 33 percent renewable energy sources by 2020. California also led in new wind energy with 300 MW, ahead of Kansas (250 MW), Michigan (almost 200 MW), Texas (150 MW), and New York (100 MW).
In other renewable sources, biomass capacity additions totaling less than 500 MW were almost evenly spread among Virginia, Florida, Georgia, New Hampshire, and Wisconsin. The state of Washington led in hydropower expansions with around 150 MW in new capacity, followed by Pennsylvania.
A new report says more corporations are looking to their procurement departments to manage the costs and spending of their marketing departments through strategic sourcing methods. The growing trend is being driven by companies' push for cost discipline in all of their operations, according to the report, "Fueling Effective Collaboration: How Strategic Sourcing Delivers Results for Marketing Groups," by Willow Grove, Pa.-based Source One Management Services.
Marketing is traditionally not a procurement-managed department. But now procurement is being tapped to aid marketing in providing supplier selection support, cost benchmarking, resource identification, and contract negotiation. The goal, says Source One, a procurement services and strategic sourcing consultancy, is to obtain the best pricing and raise the value a company gets from its marketing suppliers (e.g., external agencies of record) through strategic, long-term supplier relationships.
If a company has multiple marketing groups, then centralized control of spend is another desire for cost efficiency, Source One says. Procurement departments accomplish this by researching the company's use of marketing resources through spend analyses, studying the supplier market, weeding out duplicate services, performing sourcing events (i.e., supplier identification, requests for information/proposals, and vetting), and extracting the best rates and value from chosen vendors in the contracting phase.
The process of overcoming push-back and establishing procurement's inclusion in marketing operations isn't unlike the process involved in the more traditional "spend categories" in a corporation. Procurement has to use education and collaboration to gain the trust of marketing departments, which up to now have been autonomous.
However, Source One says a particular challenge within the growing trend of procurement-managed marketing spend is getting two philosophically different departments into a mutually beneficial working relationship. Marketing is driven by "gut instincts" and qualitative, while procurement is quantitative.
"Traditionally, marketing groups would only work with procurement on tactical spend such as print materials and promotional items," said Kathleen Jordan, a Source One senior project manager. "We are beginning to see a shift in the landscape, and marketing groups need more support when it comes to their more strategic relationships that tie directly to a particular brand's campaign."