Small Business Economic Trends - December 2009

Bill Dunkelberg


Optimism Index

It has been a very difficult year and 2009 did not end on an uplifting note. The index of Small Business Optimism lost 0.3 points, falling to 88.0 (1986=100), 7.0 points higher than the survey’s second lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980). But optimism has clearly stalled in spite of the improvements in the economy since the first quarter of 2009. 

Labor Markets

The “job generating machine” remains in reverse, jobs are being lost and new hiring is very weak. The percent of the owners increased employment, but 22 percent reduced employment (seasonally adjusted). While the trend for increased employment is going in the right direction, there is no indication that job growth will be strong enough to dramatically reduce the unemployment rate. Ten percent (seasonally adjusted) reported unfilled job openings, up two points from November, a good sign. Over the next three months, 15 percent plan to reduce employment (down two points), and eight percent plan to create new jobs (up one point), yielding a seasonally adjusted net negative two percent of owners planning to create new jobs, a one point improvement from November.

Capital Spending

The frequency of reported capital outlays over the past six months was unchanged at 44 percent of all firms, holding at a record low level (data first collected in 1979). Capital spending is on the sidelines. Spending on capital projects remained at historic low levels, as did the demand for credit to finance such projects. Plans to make capital expenditures over the next few months rose two points to 18 percent, two points above the 35 year record low. Seven percent characterized the current period as a good time to expand facilities, down one point from November and only a net two percent expect business conditions to improve over the next six months, down one point from November.

Inventories and Sales

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months remained negative at negative 25 percent, but this as a six point improvement over the November reading. The net percent of owners expecting real sales gains improved one point to a negative one percent of all owners, still negative, but 30 points better than the March. Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. A net negative 28 percent of all owners reported gains in inventory stocks, a new monthly record. For all firms, a net negative four percent (a two point deterioration) reported stocks too low, so stocks are still considered a bit “excessive” relative to expected real sales volumes (which are weak).


The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 33 percent reported price reductions. Widespread price cutting contributed to the reports of lower nominal sales. Plans to raise prices fill one point to a net seasonally adjusted three percent of owners, 35 points below the July 2008 reading. One 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 two points to two percent and only three percent cited the cost of labor, so neither labor costs nor materials costs are pressuring owners.

Profits and Wages

Reports of positive profit trends were unchanged at a net negative 43 percentage points. The persistence of this imbalance is bad news for the small business community. Profits are important for the support of capital spending. Of the 12 percent of owners reporting higher earnings, 50 percent cited stronger sales (unchanged) as the cause and eight percent credited lower labor costs. For the 54 percent reporting lower earnings compared to the previous three months, 65 percent cited weaker sales, four percent each blamed rising labor costs, higher materials costs and higher insurance costs, while six percent blamed lower selling prices. Poor real sales and price cuts are responsible for much of the weakness in profits. Owners continued to reduce compensation at a record pace, with 10 percent reporting reduced worker compensation and nine percent reporting gains, unchanged from November.

Credit Markets

Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15 percent reported loans harder to get than in their last attempt, unchanged from November. Still that is not nearly as severe as the financial distress reported in the pre-1983 period.  Twenty-four months of recession have sapped the financial strength of many small firms. Thirty-three (33) percent reported regular borrowing, fairly typical of post-1983 and unchanged from November. Eight percent of all owners reported that their borrowing needs were not satisfied, down two points from November. The remaining 92 percent of all owners either obtained the credit they wanted or were not interested in borrowing. Only 4 percent of the owners reported ‘finance” as their #1 business problem (down 1 point). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. The percent of owners reporting higher interest rates on their most recent loan was seven percent, while three percent reported lower rates. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 15 percent (more owners expect that it will be “harder” to arrange financing).


 For small business owners, 2009 ended with a thud. The Optimism Index fell and finished just seven points ahead of March which was the second lowest reading in 35 years of survey history, even though the economy posted positive growth in the second half of the year.

Interest rates are at historically low levels, inflation virtually non-existent and real hourly earnings have held up well. In the first quarter of 1980, the Index reached 100 and then went on to top 107, the record high reading a few quarters later, a huge surge after a tough recession. But now the Index is 12 points below 100 and has been below 90 for nearly two years.

So why hasn’t owner optimism soared like it usually does at the end of a recession, especially one that cut so deeply into our economic fabric? The answer is “hope and change.” There is little hope and the change that is being delivered is far from encouraging. Washington is offering nothing but higher taxes and fines and fees and more regulation. Congress is passing bills with thousands of pages of hidden bombs that will go off as the legislation is passed and implemented. Federal spending has soared amazingly, yet been ineffective except at pushing the federal deficit to incomprehensible heights, promising to double our national debt in just a few years. The interest burden this will place on average Americans is astounding. Uncertainty is the enemy of economic growth and investment and Washington, D.C., the usual source of uncertainty, is delivering plenty of it. Confidence in our political leadership has tanked.

So we begin the new year with capital spending and inventory investment plans in record low territory as well as job creation plans. More owners expect sales to fall than to increase in the first quarter, more have been cutting workers and worker compensation than increasing them and reports of actual spending on capital projects are at 35 year historic lows. Interest rates are at historic lows and we have more savings to lend out, but few are willing to borrow and spend the funds.

Few view the current period as a good time to expand their businesses. Those cutting average selling prices outnumber those raising them by a 3-to-1 margin. Plenty of opportunity to spend, lots of potential pent up demand but the management team is not able to lead the economy out of its doldrums, instead choosing to erect barriers to future growth.

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

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