Small Business Economic Trends - February 2010
SUMMARY
Optimism Index
The index of Small Business Optimis gained 1.3 points, rising to 89.3 (1986=100), 8.3 points higher than the survey's second lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980:2). Optimism has clearly stalled in spite of the improvements in the economy in the second half of 2009. Small business owners entered 2010 the same way they left 2009 - depressed. The quarterly Index readings have been below 90 for 7 quarters, indicative of the severity and pervasiveness of this recession.
Labor Markets
There was no improvement in the job creation statistics for January as the Bureau of Labor Statistics data confirmed. Nine percent of the owners increased employment by an average of 3.0 workers per firm, but 19 percent reduced employment an average of 3.9 workers per firm (seasonally adjusted). Owners complained that "poor sales" was their top problem, and there is no need to hire with no new customers. It is hard for wokers to"earn their pay" in this environment, a necessity if a firm is to stay in business. Ten (10) percent (seasonally adjusted) reported unfilled job openings, unchanged from December but historically low. Over the next three months, a seasonally adjusted net negative one percent of owners planning to create new jobs, a one point improvement, but still more firms planning to cut jobs than planning to add.
Capital Spending
The frequency of reported capital outlays over the past six months rose three points to 47 percent of all firms, an improvement from December's record low reading, but historically very weak. A revival of capital spending will require a significantly improved business outlook and some support from reluctant customers. Plans to make capital expenditures over the next few months rose two points to 20 percent, four points above the 35 year record low. Five percent characterized the current period as a godo time to expand facilities, down two points from December. Only a net one percent expects business conditions to imrpove over the next six months, down one point from December, a very pessimistic reading.
Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months remained negative at negative 26 percent, one point worse than December. The net percent of owners expecting real sales gains improved four points to a net three percent of all owners, 34 points better than the March 2009 record low level. A net negative 21 percent of all owners reported gains in inventory stocks,seven points better than December's record liquidation reading.
Inflation
The weak economy continued to put downward pressure on prices. Eleven (11) percent of the owners reported raising average selling prices, but 27 percent reported average price reductions. Widespread price cutting contributed to reports of lower nominal sales. Seasonally adjusted, the net percent of owners raising prices was a negative 18 percent, a four point improvement. A net seasonally adjusted eight percent of owners plan to raise prices, an increase of five points from December. On the cost side, three percent of owners cited inflation as their number one problem (e.g. costs coming in the "back door " of the business) and only 4 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 one point better, registering a net negative 42 percentage points (not much to cheer about). The persistence of this imbalance is bad news for the small business communicaty. Profits are important for the support of capital spending. Of the owners reporting lower earnings compared to the previous three months (55 percent, up one point), 58 percent cited weaker sales, two percent each blamed rising labor costs, six percent higher materials costs and lower selling prices, and two percent higher insurance costs. 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 11 percent reporting reduced worker compensation and 10 percent reporting gains, each up one point from December. Seasonally adjusted, a net one percent reported raising worker compensation, a record low reading.
Credit Markets
Regular borrowers (accessing capital markets at least once a quarter) continue to report difficulties in arranging credit at the highest frequency since 1983. A net 14 percent reported loans harder to get than in their last attempt, down one point from December. Twenty-four (24) months of recession have sapped the financial strength of many small firms that are too numerous now in the new spending/credit environment. Too many houses were built, too many strip malls opened, too many restaurants started, too many new retail outlets were launched in the 2003-2007 period and all of them cannot be supported by a consumer that now chooses to save. Thirty-two (32) percent reported regular borrowing, down one point from December and historically very low. Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many potentially good borrowers are simply on the sidelines. Eleven (11) percent of all owners reported that their borrowing needs were not satisfied, up three points from December. The remaining 89 percent of all owners either obtained the credit they wanted or were not interested in borrowing. Only five percent of the owners reported "finance" as their #1 business problem (up one point). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem.
COMMENTARY
Washington still does not get it. It pays lip service to the fact that small business generates half of private sector GDP and creates over two-thirds of private sector net new jobs, but when it comes time to provide help, small business gets $30 billion IF banks decide to accept the TARP funds to support loans and IF the owners can subsequently get a loan from a bank. But for most firms, this dinky amount is of little help. More so, this new aid misses the main problem since only five percent of small business owners cite "financing" as their top business problem but 31 percent cite "poor sales." We are building less than half of the number of housing units normally constructed, putting a huge dent in mortgage and construction loan demand. We are also buying two-thirds the number of cars normally purchased, so auto credit demand is way off too. Plans for capital expenditures and inventory investment among small firms are at 35 year lows. Even large bank CEOs now admit loan demand is weak! "Stimulus" for this administration has not focused on supporting consumer spending nor been designed with a sense of urgency as central to policy formulation.
Instead, Congress is focusing on a health care bill that features crippling taxes and mandates for small firms, fully expecting to have it in place and implemented (10 years of taxes, seven years of "reform") this year with unemployment at 10 percent and expected by many to rise. Lawmakers also allowed the minimum wage to rise by nearly 11 percent in July 2009, catapulting teen job loss to over 500,000 and an unemployment rate of 27 percent in the second half even though the economy started growing. This was double the loss in the first half when GDP growth was plummeting. If the administration wants to count "jobs created and saved" it should also be accountable for "jobs destroyed or prevented."
On top of all that bad news, small business owners fear Washington will then feel the need to "stimulate" us with even more spending and larger government (and taxes), the death knell for private sector vitality. The National Bureau of Economic Research expected to declare a recession bottom in the second half of 2009. Manufacturing turned in the third quarter, unemployment managed a positive month in the fourth, both determinants of the turning point. The NFIB indicators do not appear to agree, however. At the end of the 1982 recession (Q4, 1982), the Index value was 98, the percent of owners viewing that period as a good time to expand was nince percent and the net percent expecting better business conditions was 47 percent. The January Index value is 89.3, the percent of owners viewing the current period as a good time to expand is five percent and only a net one percent expect better business conditions in the first half, not really strong signs of a turn in the economy. The decline in the unemployment rate reflects a reduced number of individuals looking for a job and is more consistent with the NFIB forecast which did not anticipate a continued rise in the unemployment rate above 10 percent. The loss of a lock on 60 Senate votes for the Democrats may be encouraging to some owners, but the President and Congressional leaders still sound like they plan to press on with their agenda, not good news for small business owners.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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