WASHINGTON (MNI) - The following is the text of the National Federal of Independent Business summary of its Small Business Optimism index, published Tuesday:

The National Federation of Independent Business Index of Small Business Optimism improved slightly in January to 89.3, 1.3 points above December's reading. January's index is 8.3 points higher than the survey's second lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980). But optimism has clearly stalled in spite of the improvements in the economy in the second half of 2009. The quarterly Index readings have been below 90 for 7 quarters[1], indicative of the severity and pervasiveness of this recession.

"Small business owners entered 2010 the same way they left 2009, depressed," said William Dunkelberg, NFIB chief economist. "The biggest problem continues to be a shortage of customers."

Optimism Components Net % Change

PLAN TO INCREASE EMPLOYMENT -1% +1 PLAN TO INCREASE CAP. OUTLAYS* 20% +2 PLAN TO INCREASE INVENTORIES -4% +4 EXPECT ECONOMY TO IMPROVE 1% -1 EXPECT HIGHER REAL SALES 3% +4 CURRENT INVENTORY SATISFACTION -1% +3 CURRENT JOB OPENINGS* 10% 0 EXPECTED CREDIT CONDITIONS -13% +2 NOW A GOOD TIME TO EXPAND* 5% -2 EARNINGS TRENDS -42% +1

* Note: These components are measured as actual percentages of all respondents and are not net percentages. A net percentage is the percent positive minus percent negative.

Employment

Owners reported workforce reductions that average .52 workers per firm, basically unchanged for the past several months. Nine percent of the owners increased employment by an average of 3 workers per firm, but 19 percent reduced employment an average of 3.9 workers per firm (seasonally adjusted).

Ten percent (seasonally adjusted) reported unfilled job openings, unchanged from December but historically low. Over the next three months, 10 percent plan to reduce employment (down five points), and 10 percent plan to create new jobs (up 2 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs, a one-point improvement but still more firms planning to cut jobs than planning to add.

Capital Spending

The frequency of reported capital outlays over the past six months rose three points to 47 percent of all firms, an improvement from Decembers record-low reading, but historically very weak. Capital spending is on the sidelines (as is the demand for loans to finance these activities). Of those making a capital outlay, 32 percent reported spending on new equipment (up two points), 16 percent acquired vehicles (up one point), and 10 percent improved or expanded facilities (down one point). Three percent acquired new buildings or land for expansion (down one point), and 10 percent spent money for new fixtures and furniture (up 3 points).

A revival of capital spending will require a significantly improved business outlook and some support from reluctant customers. Plans to make capital expenditures over the next few months rose two points to 20 percent, four points above the 35-year record low. Five percent characterized the current period as a good time to expand facilities, down two points from December. Only a net 1 percent expects business conditions to improve over the next six months, down one point from December and a very pessimistic reading.

Inventories and Sales

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months remained negative at negative 26 percent, one point worse than December. Unadjusted, 17 percent of all owners reported higher sales (unchanged) while 47 percent reported lower sales (up three points) quarter over quarter.

The net percent of owners expecting real sales gains improved four points to a net 3 percent of all owners, 34 points better than the March 2009 record low level.

Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. A net negative 21 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), seven points better than December's record liquidation reading (monthly surveys were started in 1986). This is the 22nd negative double-digit month in a row and the 32nd negative month in a row.

Inflation

The weak economy continued to put downward pressure on prices. Eleven percent of the owners reported raising average selling prices, but 27 percent reported average price reductions. Widespread price cutting contributed to the reports of lower nominal sales. Seasonally adjusted, the net percent of owners raising prices was a negative 18 percent. More firms reduced prices than increased them in all industry groups.

On the cost side, 3 percent of owners cited inflation as their number one problem (e.g., costs coming in the back door of the business), so materials costs are not significantly pressuring owners.

Earnings

Reports of positive profit trends were a point better, registering a net negative 42 percentage points (not much to cheer about). The persistence of this imbalance is bad news for the small business community. Profits are important for the support of capital spending. Not seasonally adjusted, 12 percent reported profits higher (unchanged), but 55 percent reported profits falling (up 1 point).

"Don't expect much spending or hiring until these trends reverse," said Dunkelberg.

Of the owners reporting higher earnings (12 percent, unchanged), 50 percent cited stronger sales (unchanged) as the cause and 8 percent each credited lower labor costs, lower materials costs and higher selling prices. For those reporting lower earnings compared to the previous three months (55 percent, up one point), 58 percent cited weaker sales, 2 percent each blamed rising labor costs, 6 percent higher materials costs and 2 percent higher insurance costs, while 6 percent blamed lower selling prices. Four percent blamed regulatory costs. Poor real sales and price cuts are responsible for much of the weakness in profits.

Credit

Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 14 percent reported loans harder to get than in their last attempt, down a point from December.

Eleven percent of all owners reported that their borrowing needs were not satisfied, up three points from December. The remaining 89 percent of all owners either obtained the credit they wanted or were not interested in borrowing. Only 5 percent of the owners reported "finance" as their number one business problem (up one point).

** Market News International Washington Bureau: 202-371-2121 **