Small Business Economic Trends - February 2009

Bill Dunkelberg


Optimism Index

For small-business owners, January started off the new year as badly as Decembed ended the old one. The Index of Small-Business Optimism fell 1.1 points to 84.1 (1986=100), the second lowest reading in the 35-year history of the NFIB survey.

Labor Markets

Eleven (11) percent (seasonally adjusted) reported unfilled job openings, down 3 points from December (the 34-year average is 22 percent), indicating a substantial increase in the unemployment rate (between 7.5 percent and 8 percent) in the next few months. Over the next three months, 9 percent plan to create new jobs (up 1 point), and 14 percent plan workforce reductions (down 5 points), yielding a seasonally adjusted net-negative 6 percent of owners planning to create new jobs, the third lowest reading in survey history and unchanged from December. Lower readings occurred only in the 1974-75 and the 1980-82 recession periods.

Capital Spending

After falling 5 points in December, the frequency of reported capital outlays over the past six months was steady at 51 percent of all firms. Owners continue to defer any project not essential to the survival of the firm (and consequently loan demand is lower). Plans to make capital expenditures over the next few months rose 2 points to 19 percent, still historically very low, but at least headed up. Six percent characterized the current period as a good time to expand facilities, down 1 point from December and historically low.

Inventories and Sales

Expectations for gains in real sales gave up 2 points, falling to a net-negative 20 percent expecting improvements (one of the worst readings in survey history, but still better than the negative 23 percent reading in 1980). Small-business owners continued to liquidate inventories. A net-negative 18 percent of all owners reported gains in inventory stocks 3 points better than December, but the 10th negative, double-digit month in a row and the 20th negative month in a row. For all firms, a net-negative 6 percent (a 1 point improvement) reported stocks too low, seasonally adjusted. The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months lost 2 points, falling to a net-negative 31 percent, the worst reading in survey history. The net-percent of owners expecting gains in real sales volumes fell to a net-negative 20 percent (down 2 points) seasonally adjusted. Plans to add to inventories (on purpose) lost 6 percentage points, falling to a net-negative 10 percent of all firms, seasonally adjusted. Seasonally unadjusted, 12 percent plan to add to stocks (unchanged) while 17 percent will reduce stocks (unchanged).


The frequency of reports of price cutting in the prior three months reached "frenetic levels" in January. The net percent of owners reporting higher average selling prices dropped 9 percentage points to a net negative 15 percent. Unadjusted, 15 percent reported raising average selling prices, down 2 points, and 28 percent reported lower selling prices, up 4 points from December. The percent of owners citing inflation as their No. 1 problem fell 1 point to 6 percent. In July, 20 percent cited inflation as their single most important problem, indicating that inflation is fading as a concern for owners, replaced by worries over declining sales. Plans to raise prices fell 1 point to a net seasonally adjusted 2 percent of owners, 36 points below the July reading and down 1 point from December.

Profits and Wages

Reports of positive profit trends gave up another 5 points, falling to a negative 47 percentage points, a new record low and quite a contrast to a year ago when reports of positive profit trends were 20 points better. Not seasonally adjusted, 10 percent reported profits higher (down 2 points), but 58 percent reported profits falling (up 5 points). Pricing power has vanished and reports of sales declines are at record high levels. Wage pressures are falling, providing some positive support to the bottom line. Seven percent of the owners reported reducing worker compensation, double earlier months and a survey record high. Only 12 percent reported raising worker compensation, a survey record low. For those reporting lower earnings compared to the previous three months (58 percent, up 5 points), 59 precent cited weaker sales (up 8 points), 12 percent cited higher materials costs (including energy), 5 percent blamed lower selling prices, 3 percent named higher compensation costs and 2 percent cited insurance costs. Overall, the poor  profit picture is a result of reduced consumer spending and dramatic declines in selling prices.

Credit Markets

As for credit markets, the picture is mixed: as the economy weaknes, loan demand fades as fewer capital projects are planned and inventory investment falls. Only 35 percent reported regular borrowing up 2 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). Thirty-three (33) percent reported all their borrowing needs met (up 1 point) compared to 8 percent who reported problems obtaining desire financing (up 2 points). The net precent reporting all borrowing needs satisfied fell 1 point to 25 percent. The net percent of owners reporting loans harder to get rose a point to 13 percent of all firms, 1 point higher than the expansion high reached in 1991. No credit crunch has appeared to date beyond the normal cyclical tighetning of credit. Fewer loans are being made, but a substantial share of the decline is due to lower demand, not problems on the supply side.


The failure of the Index of Small Business Optimism to rebound from historic low readings as it did in 1980 indicates that the recession will encompass the first quarter with little chance for a bottom before the second quarter. Of course, the 1980-82 period could be viewed as one long "recession," but officiallyit contained two recessions. The spike in economic activity in-between was short lived. But the Index did not revisit its lows in the second downturn and signaled the start of the expansion in January of 1983 rising to a value of over 100, 20 points above the 1980 low.

Prices and wages are being cut with unprecedented frequency, suggesting that firms are adjusting employment and related costs very quickly while moving with alacrity to rid the shelves of excess inventory. One interpretation of this is that we are getting the job done more quickly, shortening the time until a bottom is reached. A concern, however, is that a "spiral" will develop that will produce a significant overshoot in employment and inventory reductions, dragging the economy into some sort of depression with widespread business failures and consumer bankruptcies. Certainly record reports of declining profits reinforce this concern.

With reports of sales declines and record levels, pricing power has vanished. Some of this is an echo from the rapid decline in energy prices, but is driven by the substantial decline in consumer spending (coupled with unprecedented declines in consumer credit). Consumers are saving (finally) and those with a job are seeing their real incomes rise as prices fall. Hopefully, they will see past the deluge of dire warnings from Washington, D.C. and New York and take advantage of low prices and interest rates and replace a few of the 10 million cars that are usually lost each year. Measures of consumer sentiment confirm that they are scared. The problem is not reduced spending from those losing jobs, but reduced spending from everyone, including those unaffected to date by the recession (9 out of 10 will still have their jobs at the worst). Discretionary fiscal policy will not save the economy, as usual it is too late and poorly focused. We have been in a recession for a year and Congress has yet to come to grips with it. As usual, the private sector will lead us out of the recession, but it would be helpful if our leadership stopped scaring everybody.

This survey was conducted in January 2009. A sample of 3938 small-business owners/members was drawn. Eight hundred twenty-six (826) usable responses were received - a response rate of 21 percent.

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

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