Small Business Economic Trends - April 2009

Bill Dunkelberg


Optimism Index

The Index of Small Business Optimism fell 1.6 points in March to 81.0 (1986=100), still the second lowest reading in the 35 year history of the NFIB survey (80.1 is the low, reaching in 1980Q2). Two of the Index components improved and 8 declined. There were no components that delivered a strong signal of improvement, that will have to wait for the April survey.

Labor Markets

Seasonally adjusted, there was a decline in average employment per firm of 0.74 workers reported for the past three months by small business owners in March, not as large as the February decline. But, the first quarter job losses were the worst in survey history. Six percent of the owners increased employment by an average of 3.4 workers per firm but 28 percent reduced employment at average of 4.3 workers per firm (seasonally adjusted). Ten (10) percent (seasonally adjusted) reported unfilled job openings, down one point from February, relatively stable for the past few months, historically low but not as low as in the 1980-82 period. Over the next three months, 12 percent plan to reduce employment (up two points), and 12 percent plan to create new jobs (down one point), yielding a seasonally adjusted net negative 10 percent of owners planning to create new jobs, seven points lower than February. In addition to reducing employment, owners are reducing compensation as well. A record high 11 percent reported reducing worker compensation and a record low 11 percent reported raising worker compensation, helping to keep the lid on labor costs. Seasonally adjusted, a net four percent reported raising worker compensation, a record low.

Capital Spending

The frequency of reported capital outlays over the past six months fell two points to 50 percent of all firms. Owners continue to defer any project not essential to the survival of the firm. Plans to make capital expenditures over the next few months fell two points to 16 percent, historically very low. One percent characerized the current period as a good time to expand facilities, down 2 points from February, a reading only one point higher than the record low reached in the 1980-82 recession.

Inventories and Sales

The percent of all owners (seasonally adjuste) reporting higher sales in the past three months improved three points, rising to a net-negative 28 percent. Expectations for gains in real sales gave up nine points falling to a net-negative 29 percent who are expecting improvements - the worst reading in survey history. Small business owners continued to liquidate inventories. A net-negative 5 percent reported stocks too low (seasonally adjusted). Inventories are being slashes, in part to match up to terrible expectations for real sales growth, and have been for months.


Small business owners continued to liquidate inventories. A net negative 23 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), four points lower than February. Inventories are being reduced at a record pace. Widespread price cutting is being used to accomplish the reductions. For all firms, a net negative four percent (a one point improvement) reported stocks too low. But the net percent of all owners (seasonally adjusted) reporting higher sales in the past three months deteriorated six points, falling to a net negative 34 percent, not a helpful sign. Plans to add to inventories (on purpose) fell three points to a net negative 13 percent of all firms, seasonally adjusted. Seasonally adjuste, 16 percent will reduce stocks (up 11 points). New orders will remain depressed until stocks look lean relative to expected sales, which are quite depressed in the current period.

Profit and Wages

Reports of positive profit trends fell two points to a net negative 46 percentage points, one point better than the January record low. Not seasonally adjusted, 11 percent  reported profits higher (unchanged), but 63 percent reported profits falling (up four points). Overall, the poor profit picture is a result of reduced consumer spending and dramatic declines in selling prices. Wage pressures are falling as owners not only reduce employment but also the compensation of remaining workers. Eleven (11) percent of the owners reported reducing worker compensation, double earlier months and a survey record high. Only 11 percent reported raising worker compensation, a survey record low. Seasonally adjusted, a net 4 percent reported raising compensation, a survey record low.

Credit Markets

As the economy weakened, loan demand faded as fewer capital projects were undertaken, and inventory investment fell as stocks were liquidated. Thirthy-three (33) percent reported regular borrowing, down three points and typical of the past 20 years. Because of the slowdown in the economy, the credit worthiness of many potential borrowers has deteriorated over the last year, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards). Twenty-nine (29) percent reported all their borrowing needs met (down three points) compared to 10 percent who reported problems obtaining desire financing (up two points; not seasonally adjusted). The net percent reporting all borrowing needs satisfied fell five points to 19 percent, a new low for the series. However, the net percent of owners reporting loans harder to get fell a point to 12 percent of all firms, no spike in complaints on this measure. Certainly fewer loans are being made, but a substantial share of the decline is due to lower demand, not unusual problems on the supply side. It is harder to find creditworthy borrowers these days. Record sales declines have a way of weakening balance sheets and income statements.


Small business owners are clearly cutting costs at a very rapid pace (as are larger firms as well), which primarily involved reducing employment. Cost cutting is likely being over-done since there is uncertainty about the future, in particular when the recession will end, and earnings are in the tank. What this portends, however, is a rapid improvement in employment and earnings once the economy establishes a forward momentum. Sharp recoveries are possible only after sharp declines.

Capital spending and inventory investment are at or near record low levels and, more importantly, have remained there longer than during any recession in the 35 year NFIB survey history. This is feeding an ever enlarging pool of "pent-up demand." Consumers are accumulating a similar pool of unfilled spending needs as well. Car sales will not continue all year at the 9 million rate recorded at the start of 2009. More will be bought, not a return to 16 million, but a gain. Normally, well over a million new homes, apartments, and condos are needed each year, but new construction is a third of that. More houses will be built. This will be start of the private sector rescue of the economy. Some fiscal stimulus will start to filter in, but it will, as always, be late to the party. The "stimulus package" and the political urgency surounding it was a smoke screen for other agendas.

Easily available credit allowed consumers to spend furniture income as well as liquidate some wealth. Now consumers are repaying that debt (oustanding credit keeps falling) and the savings rate has lifted from 0% to 4 percent to accomplish the "deleveraging." This evens out eventually and normal consumer spending growth will be restored, but with a higher savings rate. Credit (cards) does not increase consumer's income, but allowes the user to move spending around in time. In the long haul, income determines spending. Those iwth a job are seeing their real incomes rise as prices fall. The economic weakness is not caused by reduced spending from those losing jobs, but reduced spending from everyone who has a job, including those unaffected to date by the recession (9 out of 10 will still have their jobs at the worst).

The uncertainty now lies with government policies. Just how much of a headwind will new regulations, "nationalization," higher taxes, spending that diverts private resources to public use and a stunning level of borrowing that could crowd out private investment pose for the economy? Can the Federal Reserve reclaim the liquidity it has created before inflation sets in? Time and politics will tell.

This survey was conducted in March 2009. A sample of 3938 small-business owners/members was drawn. Eight hundred sixty-seven (867) usable responses were received - a response rate of 22 percent.

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2009, NFIB retains ownership. All Rights Reserved.

Print page