NATIONAL FEDERATION OF INDEPENDENT
BUSINESS
SMALL BUSINESS ECONOMIC TRENDS
EMBARGO NOVEMBER 10,
(Based on 2059 respondents to the OCTOBER survey of a
random sample of
NFIB’s member firms, surveyed through 10/30/09)
**draft**
William C. Dunkelberg, Chief Economist (610) 209-2955
OVERVIEW
>> Optimism: up 0.3 points, but no surge.
>> Labor market indicators improve but still
“negative”.
>> Inflation – price cutting continues but
moderates some.
>> Capital spending and inventory investment
plans still weak.
>> Inventory reductions remain near historic
high.
>> Poor sales, not credit availability is the
owner’s top concern
The Index of
Small Business Optimism gained 0.3 points, rising to 89.1 (1986=100), 8.1
points higher than the survey’s second lowest reading reached in March (the
lowest reading was 80.1 in 1980:2). In
the 1980-82 recession period, the Index was below 90 in only one quarter. In this recession, the Index has been below
90 for 6 quarters, indicative of the severity of this downturn. The October gain was minor, so the good news
is still “less bad news”, the Index didn’t fall. Four of the ten Index components posted gains,
2 were unchanged, 4 declined (Table below).
The gain was a mixed bag, with
some of the “hard” components improving (job creation and inventory investment
plans) but others (capital spending plans) fading. The biggest problem was a dearth of customers
– 33 percent said “weak sales” was their top business problem. Only 4 percent complained about financing
(compared to as high as 37 percent in the early 1980s). With historically low plans to invest in
inventory or plant and equipment, credit demand is low (not “credit supply”!).
Typically, owner optimism soars at
the end of recessions as owners see the promise of a resumption of growth based
on solid fundamentals (like population growth, and markets that have “cleaned
up” in the recession) and policy corrections.
The 1993-2000 expansion was an exception. Optimism didn’t recover until after the
proposed health care reform was defeated and the Democrats lost Congress. Of course, the Y2K-Telecom boom took over in
the latter half of the decade, leading to the highest employment rate in
history (64.5 percent of the adult population had a job in 2000).
[NOTE:
the term “net” means that the percent of owners giving an unfavorable answer
has been subtracted from the percent of owners giving a positive or favorable
response]
THE INDEX OF SMALL BUSINESS OPTIMISM AND ITS COMPONENTS
|
|
|
|
POINTS |
CONTRIBUTION |
|
|
|
LEVEL |
CHANGED |
TO CHANGE |
|
CREATE NEW JOBS |
|
-1% |
+3 |
--% |
|
MAKE CAPITAL OUTLAYS |
|
17% |
-1 |
--% |
|
INCREASE INVENTORIES |
|
-3% |
+3 |
--% |
|
JOB OPENINGS HARD TO FILL |
|
8% |
0 |
--% |
|
INVENTORIES TOO LOW |
|
-3% |
-3 |
--% |
|
GOOD TIME TO EXPAND |
|
7% |
-2 |
--% |
|
EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS |
|
11% |
+3 |
--% |
|
EXPECT HIGHER REAL SALES |
|
-4% |
+2 |
--% |
|
EXPECT EASIER CREDIT COND. |
|
-16% |
-1 |
--% |
|
EARNINGS TRENDS POSITIVE |
|
-40% |
0 |
--% |
|
|
|
|
|
|
|
TOTAL CHANGE INDEX OF SMALL BUS. OPTIMISM (1986 = 100) |
|
89.1 |
+4 +0.3 |
100% |
[Column 1 is the current reading, column 2 the
change from the prior month, column 3 the percent of the total change in the
Index accounted for by each component; “--%” means the percent <1% or not a
meaningful calculation. Index is based
to the average value in 1986, components are not]
LABOR MARKETS:
In October, small business owners reported a decline
in average employment per firm of 0.52 workers reported during the prior three
months, a big improvement from May ‘s record loss of 1.26 workers per firm and
better than September’s loss of .83 workers per firm. But still a loss of jobs. Eight percent of the owners increased
employment by an average of 3.5 workers per firm, but 19 percent reduced
employment an average of 4.2 workers per firm (seasonally adjusted), both
statistics better than September readings.
The “job generating machine” is still in reverse. Sales are not picking up, so survival
requires continuous attention to costs – and labor costs loom large. An increase in the minimum wage of over 10
percent was hardly helpful, as teen unemployment has surged (over 440,000 jobs
lost since April, the unemployment rate rose to 25.9 percent). Still, job reductions are fading and job
creation will cross the “0” line by the end of the year.
Eight percent
(seasonally adjusted) reported unfilled job openings, unchanged from August and
September. Over the next three months, 16
percent plan to reduce employment (unchanged), and 9 percent plan to create new
jobs (up 2 points), yielding a seasonally adjusted net -1 percent
of owners planning to create new jobs, a 3 point improvement, but still more
firms planning to cut jobs than planning to add. Not seasonally adjusted, net job creation
plans were positive in the Professional Services, FIRE (Finance, Insurance, Real Estate) and
Manufacturing, perhaps in response to the improvement in exports and auto
production. Only in the West North
Central states did more firms plan to increase employment than planned job cuts
(9 Census regions).
CAPITAL SPENDING:
The frequency of reported
capital outlays over the past six months
rose 1 point to 45percent of all firms, 1 point above the record low
reading (data first collected in 1979) logged in September. Capital spending (and the demand for credit
to financing it) is on the sideline. Of
those making a capital outlay, 31 percent reported spending on new equipment (up
1 point), 17 percent acquired vehicles (up 1 point), and 11 percent improved or
expanded their facilities (up 2 points). Three percent acquired new buildings
or land for expansion (down 1 point) and 9 percent spent money for new fixtures
and furniture (up 1 point). Improved
statistics, but only by a point in each category and overall – spending remains
in the doldrums.
Plans
to make capital expenditures over the next few months fell 1 point to 17
percent, only one point above the 35 year record low. Seven percent characterized the current
period as a good time to expand facilities, down 2 points from September. However, a net 11 percent expect
business conditions to improve over the next six months, up 3 points from September
but historically low. Consumer spending
is weak, recent reports on consumer sentiment are discouraging and there is nothing
on the table in
SALES
The net percent of all owners (seasonally
adjusted) reporting higher sales in the past three months remained negative at -31 percent, down 5 points and only 3
points above the record low set in March and revisited in July. Some of this decline is likely due to the
termination of “Cash for Clunkers”. Unadjusted, 17 percent of all owners reported
higher sales (down 4 points) and 44 percent reported lower sales (up 3 points). Widespread price cutting continued to
contribute to reports of lower nominal sales (see below.
After
a six point increase in August, the net percent of owners expecting real sales
gains improved 2 points to a negative 4 percent of all owners, still negative
but 27 points better than the March record low level.
INVENTORIES:
Small business owners
continued to liquidate inventories and weak sales trends gave little reason to
order new stocks. A net negative
26 percent of all owners reported gains in inventory stocks (more firms cut
stocks than added to them, seasonally adjusted), 2 points worse than September
and 1 point better than the record low of negative 27 recorded each month from
April through July. This is the 19th
negative double digit month in a row and the 29th negative month in
a row. Unadjusted, 7 percent reported gains and 32 percent reported inventory reductions. In construction, 3 percent increased
inventories while 38 percent reported reductions over the past few months. Both figures were worse than September, and
indicate that the “housing adjustment” is still underway.
For all firms, a net negative
3 percent (down 3 points) reported stocks too low. Plans
to add to inventories (on purpose) improved 3 points to a negative 3
percent of all firms (seasonally adjusted), progress, but still not
particularly stimulative as this suggests owners are still leaning toward
further reductions, perhaps for cost cutting.
But if sales pick up, these plans will be quickly abandoned. Seasonally unadjusted, 10 percent plan to add
to stocks (up 1 point) while 18 percent will reduce stocks (unchanged).
INFLATION:
The weak economy continued
to put downward pressure on prices. Ten
percent of the owners reported raising average selling prices, but 30 percent
reported price reductions. Widespread
price cutting is a major factor shaping the reports of lower nominal
sales. Seasonally adjusted, the net
percent of owners raising prices was negative 17 percent ( 4 points more
positive than September), far more cutting prices than raising them. More firms planned to reduce prices than
increase them in all industry groups, but the largest gap was in Construction,
where 43 percent reported price reductions and only 6 percent of the owners
reported raising average selling prices.
Plans to raise prices fell 1
point to a net seasonally adjusted 5 percent of owners, 33 points below
the July 2008 reading. In construction,
a net negative 6 percent plan price hikes, in manufacturing, a net 5 percent, and
among retailers, a net 11 percent plan hikes.
On the cost or input side,
the percent of owners citing inflation as their number one problem (e.g. costs
coming in the “back door” of the business) fell 2 points to 2 percent and only
4 percent cited the cost of labor, so neither labor costs nor materials costs
are pressuring owners.
PROFITS
Reports of positive profit
trends were unchanged at a net negative 40 percentage points. The persistence of this imbalance is bad news
for the small business community and a contributor to the reported difficulties
in obtaining credit. Prospects are not
good for sales and the P&L statements have deteriorated. Not seasonally adjusted, 12 percent reported
profits higher (down 2 points), but 51 percent reported profits falling (up 1
point). No doubt we are losing firms in
this recession.
Owners continued to reduce
compensation at a record pace, with 11 percent reporting reduced worker
compensation. Reports of increased
compensation fell 3 points to 11 percent.
Seasonally adjusted, a net 4 percent reported raising worker compensation,
down 3 points from September and only 1 point above June’s record low
reading.
Of the owners
reporting higher earnings (12 percent, down 2 points), 50 percent cited
stronger sales (up 7 points) as the cause and 8 percent each credited lower labor
costs and lower materials costs. For those reporting lower earnings compared to
the previous three months (52 percent, up 2 points), 62 percent cited weaker
sales, 4 percent each blamed rising labor costs and higher materials costs, 2 percent blamed higher insurance
costs, and 8 percent blamed lower selling prices. Four percent blamed regulatory costs. Poor sales and price cuts are responsible
for much of the weakness in profits.
CREDIT MARKETS:
For those who want to borrow, getting a loan
continues to be difficult, with a net 14 percent reporting loans harder to get
than in their last attempt. With very
weak plans to make capital expenditures, to add to inventory and expand operations,
it would appear that many of those trying to borrow are having cash flow
difficulties due to very weak sales (most frequently reported as the top
business problem).
Thirty-three percent
reported regular borrowing, typical of the post-1983 period, unchanged from
September. Overall, loan demand remains
weak due to widespread postponement of investment in inventories and record low
plans for capital spending. In addition,
the continued poor earnings and sales performance has weakened the credit worthiness
of many potential borrowers. This has
resulted in tougher terms and higher loan rejection rates (even with no change
in lending standards), and there is no rush to borrow money like that observed
in the pre-1983 period when regular borrowers made up over 50 percent of all
owners (even with a 21% prime rate of interest).
Twenty-nine percent reported
all their borrowing needs met (down 1 point) compared to 9 percent who reported
problems obtaining desired financing (down 1 point, not seasonally adjusted). The net percent reporting all borrowing
needs satisfied was unchanged at percent. The recession is now 22 months old, straining
the financial resources of more and more small firms. The economy may have turned, but it’s a “slow
turn” so far.
The net percent of owners reporting
loans harder to get was unchanged at 14 percent of all firms. But only 4 percent of the owners reported
“finance” as their #1 business problem.
Pre-1983, as many as 37 percent cited financing and interest rates as
their top problem. It is no surprise
that credit is more difficult to obtain; sales prospects and profit trends are
very weak.
Firms do get “credit” and
manage cash flow through the use of trade credit (provided by suppliers) and
managing the collection of receivables and the payment of bills. Forty-seven percent reported that receivables
were being collected more slowly compared to 3 months earlier (down 5 points). Only 1 percent reported faster
collections. Eighty-eight percent of the
owners reported outstanding receivables to collect. Twenty-seven percent reported making bill payments
more slowly than three months earlier (down 2 points); only 2 percent were
paying ahead of schedule. One percent
reported trade credit easier to get, 17 percent said it was harder (down 3
points). Overall, the environment for
trade credit use and receivables collection has improved, but just a tiny
bit.
The percent of owners
reporting higher interest rates on their most recent loan was 7 percent, while 3
percent reported lower rates. The net
percent of owners expecting credit conditions to ease in the coming months was
a seasonally adjusted net negative 16 percent (more owners expect that
it will be “harder” to arrange financing), unchanged from September. Owners do
not see credit conditions easing much in spite of the Fed’s hugely expansionary
policies.
OVERVIEW:
The Administration has
recently jumped on the “small business bandwagon”, although little important
action has been taken. It sounds like
the Administration thinks the reason small firms aren’t hiring is that they
can’t get credit. Although credit is
harder to get than in the expansion (as it should be!), “financing” is cited as
the “most important problem” by only 4 percent of NFIB’s hundreds of thousands
of member firms. Although a nice
gesture, enhancing SBA lending programs wont help much – too many owners have
no reason to borrow. Record low
percentages cite the current period as a good time to expand, more owners plan
to reduce inventories than to add to them, and record low percentages plan any
capital expenditures. In short, the demand
for credit is in short supply; there is not a major shortage of credit supply
(at least on
Statistically, we are in a
huge “V” recovery, with GDP rebounding from a 6.4 percent decline in the first
quarter to 3.5 percent growth in the third.
That is quite a “comeback”, a very steep “V”. But unless the consumer comes back, the
recovery is likely to turn into the “square root recovery” (\Γ), slower,
flatter growth on the recovery leg of the V.
Federal government spending rose over 7 percent but most of the reported
jobs “saved or created” were in the public sector. Although there are other benefits to this
spending (better teaching or some road repairs for example), the average amount
spent per reported job saved or created
is nearly $250,000 (and many of these “saved” jobs were counted when an
existing employee got a raise!). Chances
for a “W”? Most likely cause would be
another serious policy goof in
Overall, the small business
job machine is still in reverse, due to continued declines in reported sales,
rising labor costs, and a need to cut costs.
Reported capital spending is at historic low levels, owners are still,
on balance, reducing inventory stocks (only 7 percent reported increases, 32
percent reported reductions) so orders to wholesale and manufacturing firms for
new inventory are weak. Price cutting is
rampant (though slowing) which combined with lower real sales continues to
produce record reports of earnings declines, one reason capital spending
remains low. Few firms report credit
availability as a problem, though those who are borrowing report more
difficulty and tougher terms than during the expansion. Events in
=============================================================
NFIB began surveys of its
membership in October, 1973. Surveys
were conducted in the first month of each quarter through 1985 when monthly
surveys were instituted. The first month
in each quarter is based on between 1,200 and 2,000 respondents, while the
following two monthly surveys contain between 400 and 700 respondents. The term “net percent” means that the percent
of owners giving an unfavorable response has been subtracted from the percent
giving a favorable response. If, for
example, 20 percent reported that they were going to increase the number of
workers at the firm and 5 percent reported an intention to reduce the number of
workers, the “net percent” would be 20 percent – 5 percent or a net
15 percent planning to expand employment. These figures are seasonally adjusted unless
noted. The graphs show quarterly data
(first survey month in each quarter), updated when available by subsequent
monthly surveys.