Small Business Economic Trends - December 2011

Bill Dunkelberg



The Optimism Index gained 1.8 points – it felt like spring! The numbers have been depressing for so long, any little progress looks good. The new reading is still well below the average (prior to 2008) by 8 huge points and below the comparable level in the recovery that started in 2001 by 14 points. But there was more supportive news in the details. Eight of the 10 Index components were unchanged or improved. The labor market components posted nice gains, expectations for real sales gains turned positive and the outlook for business conditions became a lot less negative. So the improvement, although small, was widespread and the forward looking components posted solid gains.


The employment picture brightened. Sixteen percent (seasonally adjusted) reported hard to fill job openings (up 2 points). Over the next three months a seasonally adjusted net 7 percent of owners are planning to create new jobs, a 4 point improvement and the strongest reading in 38 months. Still, in a decent expansion, this indicator should be at double digit levels.


The frequency of reported capital outlays over the past 6 months rose one point to 53 percent. The record low of 44 percent was reached in August 2010. The percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 24 percent, the highest reading in 40 months. Better, but 5 to 10 points below readings in a growing economy historically. Money is available, but most owners are not interested in a loan to finance the purchase of equipment they don’t need. Eight percent characterized the current period as a good time to expand facilities (seasonally adjusted), up 1 point and only a point below the best reading in the past 38 months. Overall, an improved spending picture but still far short of “normal”.


The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months gained a point, rising to a net negative 11 percent, more firms with sales trending down than up, but an improvement even if at a lousy level. As 25 percent of the owners indicated, “poor sales” is their top business problem, apparent in the frequency of reported weaker sales trends. The net percent of owners expecting higher real sales gained 8 points to a net 4 percent of all owners (seasonally adjusted), but still 9 points below January’s reading. A net negative 10 percent of all owners reported growth in inventories (seasonally adjusted), unchanged, and a signal that many firms still have to reduce their inventories to achieve balance, based on their expectations for sales. For all firms, a net negative 1 percent (down 1 point) reported stocks too low, still a very “satisfied” reading based on survey history.


Seasonally adjusted, the net percent raising selling prices was 0 percent, up 1 point. This indicates little pressure on prices overall. Twenty (20) percent plan on raising average prices in the next few months, 4 percent plan reductions. Seasonally adjusted, a net 15 percent plan price hikes, up 1 point. With some evidence that spending has picked up, some of these price hikes might stick.


Reports of positive earnings trends were 2 points worse in November at a net negative 28 percent of all owners. Most of the reports on profit trends came in before “Black Friday,” the day bottom lines are hopefully turning from red to black. The December survey will tell the story on Main Street. Not seasonally adjusted, 14 percent reported profits higher (down 1 point), and 40 percent reported profits falling (unchanged). Corporate profits are strong, lots of money being made overseas but the story is very different on Main Street. Compensation costs are rising but not at a rapid rate. Four percent reported reduced worker compensation and 13 percent reported raising compensation, yielding a seasonally adjusted net 10 percent reporting higher worker compensation, a 3 point increase and matching the highest reading since 2008. However, the readings are historically low. A seasonally adjusted 9 percent plan to raise compensation in the coming months, up 1 point.


Three percent reported financing as their #1 business problem, not an issue compared to weakness in sales or taxes or the cost of regulation. Ninety- three (93) percent reported that all their credit needs were met or that they were not interested in borrowing. Seven percent reported that not all of their credit needs were satisfied. The record low is 4 percent, reached in 2000. Fifty-one (51) percent said they did not want a loan (12 percent did not answer the question, presumably uninterested in borrowing as well). Twenty-five (25) percent of the owners reported that weak sales continued to be their top business problem, so investments in new equipment or new workers are not likely to “pay off” by generating enough additional earnings to repay the loan required to finance the investment. This is a major cause of the lack of credit demand observed in financial markets. Thirty-four (34) percent of all owners reported borrowing on a regular basis, up 4 points. A net 10 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), down 1 point. The weak recovery provides little incentive to borrow to support expansion or buy new equipment, even if interest rates are low. Four percent of owners reported higher interest rates on their most recent loan and 4 percent reported getting a lower rate. The average reported rate on short term loans (12 months or less in maturity) was 6.3 percent, basically unchanged since 2008 in spite of the Federal Reserves’ efforts to lower loan rates for small firms.


The economy is slowly righting itself, dealing with a huge excess supply of assets created in the 2003-2007 boom and the associated debt incurred to create those assets and take consumption to a record high share of GDP (the “party”). The 2000 stock crash left winners with cash and losers with worthless shares of We moved on, winners and losers declared. The housing bubble crash left a different set of assets for us to deal with. Declaring, even finding, winners and losers is a mess, not the least due to government trying to determine the outcomes. Not worthless pieces of paper but millions of houses, apartments, condos and less often discussed, retail stores, strip malls, restaurants and the like and a pile of inventory to get rid of. This process is difficult and protracted. In 2007, 845,000 new firms were formed (displacing 804,000 existing firms). This process went into reverse in 2008. More firms terminated, fewer started, fewer new homes were built, inventory went on sale to raise cash and employment was slashed as the now surplus of firms struggled to survive. Many of these sought loans to “tide them over”, loans that by now would in most instances have gone bad had they been made.

The adjustment seems to be about over. Historically high percentages of owners report inventories are in balance, reduced to match anemic consumer spending. However few plan to add to stocks as prospects for improved growth have not been optimistic. Firms have stopped firing workers, employment has adjusted to weaker sales, but hiring new workers remains muted, as sales prospects offer little reason to hire more workers. Most equipment is still working requiring little need to buy new stuff. Still a problem is the number of firms competing for reduced levels of consumer spending, experiencing poor financial performance. There is likely more to come here, more terminations. This will increase sales at the remaining firms and with a boost from modestly improving consumer spending, begin to address the unemployment problem a bit more aggressively. The excess supply of structures will continue to be a drag, but less so.

Improvements in consumer sentiment have been grudging as have the gains in owner optimism, little is happening that would make any of them more confident about the future course of the economy. It will take an election to “clear the air” and provide more certainty about our direction. The Index is still 2 points below where it was in January, not exactly progress over the year.


The bulk of the unemployed were created in the small business sector, some from business failures but more by existing owners reducing employment to cut costs. Firms with fewer than 20 workers employed 20 percent of private sector workforce in 2007 but accounted for a third of the employment decline in the recession. These “existing” firms will have to re-hire many of the workers they let go to get employment back on track. Hopefully the process is getting underway.

This survey was conducted in November 2011. A sample of 3,938 small-business owners/members was drawn. Seven hundred usable responses were received – a response rate of 20 percent.

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2011, the NFIB retains ownership. All Rights Reserved.

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