Small businesses aren't thriving, but they are feeling about as optimistic as they were heading into the recession. The National Federation of Independent Business' Optimism Index (.pdf) rose again in February to 94.5 from 94.1 in January. That's not a huge gain, but it virtually matches December 2007's value of 94.6. In good times, however, it's normal for the index to be at or above 100. Although the index didn't move up much in February, some key components improved.

First, here's a chart of the index, to understand some context:

nfib index 2011-02.png

You can pretty clearly see the trough created during the recession and start of the recovery. But you can also see that sentiment needs to move higher before the sector can be considered healthy.

Sales

Over the past few years, weak sales have been the central cause for smaller firms' troubles. After a sizable rise in January, actual sales didn't improve in February. Sales expectations did continue to climb, however:

nfib sales expt 2011-02.png

You now have to go all the way back to May 2007 to find a larger net percentage of small businesses with stronger sales expectations.

Prices

Of course, small businesses face a new headwind as oil prices rise. If inflation affects their input prices, then they will have to either raise the prices customers see or cut their margins. It looks like they're opting for the former option. Here's the NFIB's survey of actual price changes:

nfib act price 2011-02.png

You can see the big pop in February. The net percentage of small companies that increased their prices was positive for the first time since October 2008. This could indicate that rising commodity prices are beginning to affect prices more broadly. The net percent of firms planning to raise prices is also the highest since September 2008.

Employment

Hiring also brought some good news in February. The net percent of firms hiring last month was slightly higher than in January. But job openings were the highest since September 2008:

nfib job open 2011-02.png

This means a net 15% of firms said that they had job openings they are not able to fill right now, which implies job seekers will have more options with small businesses. Hiring plans also improved in February. Finally, the net percent of firms saying they intended to raise compensation in the next three months was the highest since November 2008.

Inventories

Inventory satisfaction is another important leading indicator. If firms feel their inventories are too high, then this implies weak business expectations and little hiring. If inventories are thought to be too low, then optimism is stronger and hiring may follow. In February, the largest net percentage of firms believed their inventory was too low in about seven years. Here's the statistic since 2006:

nfib inv sat 2011-02.png

Despite this inventory sentiment, however, more firms continued to cut inventories in February, though the net percent doing so was the lowest since March 2008. Firms also aren't indicating that they plan to aggressively ramp up inventories yet, as a net 2% still intend to decrease inventories in the next three to six months.

The Most Important Problems

Sales remain the most important problem for most small businesses, as 28% named them as their biggest obstacle. Government regulation and red tape was the most important problem that 19% of smaller firms face, the second most significant. That was followed by taxes, with 17% of small businesses saying they were the biggest concern. This shows that the government could still do more to help small business succeed, as those two latter factors add up to 36% of those surveyed -- which together makes them more significant obstacles than even weak sales.


Overall, this is another positive report on the improving state of small business. But it doesn't indicate that the sector is back at full strength. In just about every area the report analyzes, these firms still have further to go before they will feel like the economy is ripe for strong growth. If the current trend continues, they'll get there eventually, but probably not quickly.

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