(Based on 2059 respondents to the OCTOBER survey of a random sample of

NFIB’s member firms, surveyed through 10/30/09)


William C. Dunkelberg, Chief Economist (610) 209-2955



            >>  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]






































































  (1986 = 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]




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).





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 Washington to make owners more optimistic about the future, a recipe for depressed expectations and spending plans.





 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.    





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). 






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. 





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.






 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.   




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 Main Street where thousands of small banks have consumer deposits, now rising with a higher savings rate, to lend to good credit risks).  Failing to understand the problem leads to bad policy.  Less than 1 percent of small businesses have government sponsored loans, so the reach of the new policy will not be large in any event.  What small business needs is customers, but very little in the “stimulus” provided consumer spending support and all Washington talks about now is raising taxes and passing health care, likely a job destroyer.  A $500 billion payroll tax cut last January would have been helpful (in comparison to the “earmarks” in the stimulus bill for which spending has not even started), but such suggestions were squashed in committees.


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 Washington that sent consumers running – away.


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 Washington are not supportive of more optimism about the future – another reason not to spend or hire.   





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.