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 lost 1.3 points in February, falling back to the December reading of 88.0, only 7 points higher than the survey's second-lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980:2). The persistence of Index readings below 90 is unprecedented in survey history.

"News about the economy is for the most part improving, and therefore is an unlikely source of small business uncertainty and declining optimism. The Washington, D.C. agenda, on the other hand, remains a nightmare for small business owners and continues to be a real factor in small business owners not expecting business conditions to improve," said Bill Dunkelberg, NFIB's chief economist.

Optimism Components Net % Change

PLAN TO INCREASE EMPLOYMENT -1% 0 PLAN TO INCREASE CAP. OUTLAYS* 20% 0 PLAN TO INCREASE INVENTORIES -7% -3 EXPECT ECONOMY TO IMPROVE -9% -10 EXPECT HIGHER REAL SALES 0% -3 CURRENT INVENTORY SATISFACTION -1% 0 CURRENT JOB OPENINGS* 11% +1 EXPECTED CREDIT CONDITIONS -14% -1 NOW A GOOD TIME TO EXPAND* 4% -1 EARNINGS TRENDS -39% +3

* 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

February marked a significant shift in the average reductions in workforce size. Employment per firm, seasonally adjusted, fell 0.13 workers, down from over 0.50 workers per firm every month for the previous fourteen months. Ten percent of the owners increased employment by an average of 5.0 workers per firm, but 19 percent reduced employment an average of 3.2 workers per firm (seasonally adjusted). Over the next three months, 8 percent plan to reduce employment (down 2 points), and 13 percent plan to create new jobs (up 3 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs, unchanged and still more firms planning to cut jobs than planning to add.

"Net job creation will appear in the coming months, but the gains will be painfully slow with timid consumer spending, especially in the service sector," said Dunkelberg.

Owners complained that poor sales are their top problem, and there is no need to hire with no new customers. In this sales environment, it is hard for workers to earn their pay. Owners cannot pay workers more than the value they add to the firm.

This is why a jobs tax credit will do little to increase employment. No one can pay $40,000 for a worker to get a $5,000 tax credit unless that worker can add at least $35,000 in revenue to cover the cost of hiring. And as long as the tax credit issue is alive in Congress and not passed, employers that were ready to hire (13 percent plan to hire) will wait until they can qualify for the credit, delaying much needed gains in employment.

Capital Spending

The frequency of reported capital outlays over the past six months was unchanged at 47 percent of all firms, barely ahead of December's record-low reading. Capital spending is on the sidelines as is the demand for loans to finance these activities.

"A revival of capital spending will require a significantly improved business outlook and some support from reluctant customers," said Dunkelberg. Plans to make capital expenditures over the next few months were unchanged at 20 percent, 4 points above the 35-year record low. Four percent characterized the current period as a good time to expand facilities, down 1 point from January. A net negative 9 percent expect business conditions to improve over the next six months, down 10 points from January and a very pessimistic reading.

Sales and Inventories

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months remained negative at negative 26 percent, unchanged from January's reading. Unadjusted, 15 percent of all owners reported higher sales (down 2 points) while 46 percent reported lower sales (down 1 point). The net percent of owners expecting real sales gains lost 3 points, falling to a net 0 percent of all owners, seasonally adjusted (but still 31 points better than the March 2009 record low level). Not seasonally adjusted, 34 percent expect improvement over the next 3 months, 26 percent expect declines.

Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. A net negative 18 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), 10 points better than December's record liquidation (monthly surveys were started in 1986).

Plans to add to inventories (on purpose) lost 3 points, falling to a negative 7 percent of all firms (seasonally adjusted) - still more owners are planning to reduce stocks than planning new orders (and not borrowing money to support inventory investment). Only a pick-up in sales will turn this around. Seasonally unadjusted, 14 percent plan to add to stocks while 15 percent will reduce them.

Inflation

The weak economy continued to put downward pressure on prices. Twelve percent of the owners reported raising average selling prices, but 30 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 21 percent, 3 points worse than in January. More firms reduced prices than increased them in all industry groups.

Earnings

Reports of positive profit trends were 3 points better, registering a net negative 39 percentage points (35 points worse than the best expansion reading reached in 2005). 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 (unchanged).

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

Credit

Regular NFIB borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit. A net 12 percent reported loans harder to get than in their last attempt, 2 points better than January. Thirty-four percent reported regular borrowing, up 2 points from January and historically very low. Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many potentially good borrowers are simply staying on the sidelines.

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