INVENTORIES:

A net negative seven percent of owners reported gains in inventory stocks (seasonally adjusted), five points worse than February. Inventory reductions have continued into 2008 and at a somewhat faster pace. Unadjusted, fourteen percent reported gains and twenty-five percent reported inventory reductions. In construction, five percent reported gains and thirty-two percent reported reductions, a huge increase from February. For all firms, a net negative one percent reported stocks too low (seasonally adjusted), a three point improvement from February. This suggests that the reduction process is at an end. Even with the weak outlook for sales, owners are fairly satisfied with current stocks.

The net percent of owners expecting gains in real sales volumes lost three points, falling to a net negative three percent, seasonally adjusted. Because of the pessimistic outlook for real sales volumes, more firms plan to continue to cut stocks rather than add to them but at a pace no worse than in February. A net negative two percent of all firms, seasonally adjusted, plan to add to stocks. Seasonally unadjusted, sixteen percent plan to add to stocks while thirteen percent will reduce stocks.

Overall, the construction industry is holding up fairly well, due in part to the strength of non-residential construction activity. Except for large scale projects, resources used for residential construction can be deployed for commercial projects. But, the industry remains under pressure. Thirty-two percent reported inventory reductions compared to only five percent reporting gains (compared to fourteen percent adding and twenty-five cutting for all firms). Thirteen percent plan to increase stocks while eight percent plan reductions. Twenty-one percent reported price reductions, compared to fourteen percent for all firms. Twenty-five percent reported higher sales and forty-one percent reported lower sales over the past three months.

The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months lost three points, falling to a negative eleven percent, not a pretty picture. Unadjusted, twenty percent of all owners reported higher sales and forty percent reported lower sales. Clearly the economy is weak compared to six months ago.

INFLATION:

A slowing economy is not deterring firms from raising prices. The net percent of owners reporting higher average selling prices rose another five points to a net eighteen percent in March. An increasing number of owners worried about inflation “through the back door”, with the percent of owners citing inflation as their number one problem up four points at twelve percent, the highest reading since 1982. Plans to raise prices rose seven points to twenty-nine percent of all owners. Not good news for those concerned about inflation.

Unadjusted, thirty-four percent reported raising average selling prices, up three points, and fourteen percent reported lower selling prices, down a point. Price hikes (net of those reducing prices) were most frequent among firms in the professional services, the wholesale trades and agriculture (not seasonally adjusted). Price hikes were weakest among finance, insurance and real estate firms, where those reporting lower prices outnumbered those raising prices by twenty-two percentage points again in March. The price cutting phase in FIRE has lasted well over a year. Price hikes were also weak in construction (a net three percent raised prices).

PROFITS AND WAGES:

The percent of owners reporting earnings gains tumbled to its lowest level since early 2003. Seasonally adjusted, those reporting declining earnings outnumbered those with gains by thirty-three percentage points. Widespread price increases were unable to counter the pressures from “backdoor inflation” and weaker sales. And, twenty-four percent of all firms reported raising average compensation, more than were able to pass these costs on in higher prices. Overall, a bad news environment for profits.

Of the owners reporting higher earnings (fourteen percent, down two points), fifty percent cited stronger sales (down ten points), and seven percent credited higher selling prices. For those reporting lower earnings compared to the previous three months (fifty-three, percent, up eight points), forty-seven percent cited weaker sales (unchanged), four percent blamed higher labor costs, and seventeen percent cited higher materials costs (including energy). Four percent each cited higher insurance costs, lower selling prices and higher taxes for the adverse performance of profits. There were no complaints about credit problems.

CREDIT MARKETS:

For the eighth straight month since the Fed declared the existence of a “credit crunch”, no evidence of credit problems has appeared on Main Street. It is a Wall Street issue. Regular borrowing activity was reported by thirty-three percent of the owners, down one point from February and typical of readings for the past fifteen years. There is no evidence that there are cash flow problems that have increased dependence on credit from the banking system.

The net percent of owners reporting loans harder to get in recent months rose two points to a net seven percent after falling two points in February (eight percent said “harder,” one percent said “easier”, the average in 2007 was six percent). These measures of credit tightness have not changed much for a decade. Only two percent of the owners cited the cost and availability of credit as their number one business problem (down a point), far from the record thirty-seven percent reached in 1982 and unchanged for years (but the percent citing inflation as their number one problem is triple its level in September 2007, twelve percent ). Thirty-two percent reported all their borrowing needs met (down three points) compared to six percent who reported problems obtaining desired financing (up two points). Overall, no new credit problems, no “credit crunch” even though some small business owners must be customers of the large Wall Street banks who are tightening credit availability.

The net percent of owners reporting higher rates on their short-term loans was negative five percent (seasonally adjusted), twenty points lower than last September, a result of the impact of Fed rate cuts on variable priced loans (including lines of credit). Owners with fixed rate loans are also calling their banks asking for rate re-sets. Those owners with variable interest rate loans are happier (but savers losing interest on money lent are equally unhappy, dollar for dollar!).

The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative nine percent (more owners expect that it will be “harder” to arrange financing), a point worse than February (the average was negative eight in 2007). This indicates that more owners expect credit to tighten on Main Street in spite of the Fed’s expansionary policies. That said, there is no evidence that, as the Fed’s survey of money center banks reported, credit is being tightened for small businesses (although the squeeze on lending margins created by the Fed’s cuts could produce tighter lending standards this year to help offset the lost revenue on variable priced loans).

OVERVIEW:

Recession fears are spreading and the economy is showing definite signs of slowing, even on Main Street. For the small business sector, the decline started in September, more precisely September 19. Although there were some reasons to expect the economy to slow (can’t grow at 4.9% for long), it is also apparent that getting an official certification of recession potential induced small business owners to “cut back” before they had evidence that real slowing (lower sales for example) might occur. The official warning of recession possibilities coupled with Fed action produced a pull-back in small business (and likely consumer) spending. Currently one in four (net of the pessimists) now thinks business conditions will be worse six months from now. If correct, the odds of the rumored “second half pickup” may be optimistic. The unemployment rate is expected to rise above 5.5%, based on the NIFB data (few will have enough historical perspective to recognize this as a pretty good number, especially in an election year).

The good news is that the recession fear has infected expectations more than spending plans (which directly impact GDP and employment). This leaves open the possibility that the downturn can be modest.

The weak economy does not seem to be helping on the inflation front. The number of owners citing inflation as their number one business problem is at its highest level since 1982. A net nineteen percent, nearly one in 5 business owners (net of those cutting prices), is raising selling prices. In 2003, this measure averaged three percent and inflation was low. Inflation, once started, is hard to wring out.

The Fed seems to have zeroed in on the problems Wall Street is having. Perhaps it will focus its efforts there and stop treating the whole economy for a disease that has infected only a few firms on Wall Street, large as they may be.

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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.

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