Small Business Economic Trends - February 2011
Summary
Optimism Index
The Index of Small Business Optimism gained 1.5 points in January, rising to 94.1, not a huge gain and not the hoped-for rebound that would signify more growth in the small business sector. Gross Domestic Product (GDP) growth in the 4th quarter was a respectable at 3.2 percent but deficient compared to other recoveries. Consumer spending was up at a 4.4 percent annual rate, also a good showing, but it did not stimulate much activity in the small business sector. In part, this is a result of the concentration of the expansion in manufacturing, exporting and inventory building at large firms. Housing starts are still a million short of “normal” and weak sales still get the most votes by owners and the top business problem.
Labor Markets
Average employment change per firm was negative 0.15 employees over the past three months. After hitting the “0” line in October and November, job creation turned negative in December and deteriorated further in January. The Bureau of Labor Statistics (BLS) reported that private jobs increased a net 50,000. Construction, transportation and warehousing lost 70,000 jobs, undoubtedly weather related. Seasonal adjustments are based on an average winter, and this one has been anything but average. Thirteen (13) percent (seasonally adjusted) reported unfilled job openings, suggesting little change in the unemployment rate, due to hiring anyway. Over the next three months, 12 percent plan to increase employment (up two points), and eight percent plan to reduce their workforce (down one point), yielding a seasonally adjusted net three percent of owners planning to create new jobs, a three point loss from December. On Main Street, there are too many firms competing for low (but improving) consumer spending, not a recipe for strong employment growth.
Capital Spending
The frequency of reported capital outlays over the past six months rose four points to 51 percent of all firms, higher than previous months, but historically low and far less than what is needed after years of recession and depreciation. Owners remain in “maintenance mode”, apparently unwilling to risk new capital investments or not seeing any need for them. The percent of owners planning capital outlays in the future rose one point to 22 percent, but is still historically quite low. Money is cheap, but most owners are not interested in a loan. Prospects are still uncertain enough to discourage any but the most profitable and promising investments.
Inventories and Sales
The net percent of all owners, seasonally adjusted, reporting higher nominal sales over the past three months improved by five points to a net negative 11 percent, 23 points better than March 2009 (near the recession bottom) but still indicative of weak customer activity. The net percent of owners expecting higher real sales continued to rise, gaining five points to a net 13 percent of all owners (seasonally adjusted), a 16 point gain since September. A net negative 10 percent of all owners reported growth in inventories (seasonally adjusted), down three points. Still, more firms cutting than adding.
Inflation
The downward pressure on prices appears to be easing as more firms are raising prices and fewer cutting them. Eighteen (18) percent of owners (down two points) reported raising average selling prices, and 20 percent reported average price reductions (down four points). Seasonally adjusted, the net percent of owners raising prices was a net negative four percent. Plans to raise prices rose four points to a net seasonally adjusted 19 percent of owners, the highest reading in 27 months. With an improving economy, more and more of these hikes will stick. Overall, this is not a “deflationary” outlook, but price increases will remain moderate for some time.
Profits and Wages
Reports of positive earnings trends improved points in January, registering a net negative 28 percent. Better, but still far more owners report that earnings are deteriorating quarter on quarter than rising. Part of this is due to price cutting, which is fading in frequency as the economy continues to grow. Large firms may be posting great profits, but the trend on Main Street is not supportive of solid hiring and capital spending. Labor cost, materials costs, interest rates – not the problem. It is still weak sales. Six percent reported reduced employee compensation and 14 percent reported gains. Seasonally adjusted, a net 10 percent reported raised employee compensation, up two points, a sign that compensation is once again rising. Only a seasonally adjusted five percent plan to raise compensation, but that is the second highest reading in years. As labor markets tighten, compensation will rise.
Credit Markets
Overall, 92 percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied, and 52 percent said they did not want a loan, up two points (12 percent did not answer the question and might be presumed to be uninterested in borrowing as well). Three percent reported financing as their #1 business problem, down two points. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up one point but still near the record low. A net 10 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), continuing to trend down.
Commentary
Fourth quarter growth was estimated to be 3.2 percent, taking the level of GDP past its 2007 peak. However, this was accomplished with the bulk of the 8 million job losses over the last few years, still gone. In part, this is explained by the fact that manufacturing and exporting are leading the recovery, industries and activities that are not labor intensive. Construction, a highly labor intensive industry still remains depressed, an industry dominated by small firms historically. A million housing starts below “normal” means many missing jobs and dramatically reduced loan demand. So there was a modest increase in owner optimism, 94.1, the best reading since the economy peaked in December 2007. However, that reading was the 2nd lowest in 2007, so not a great accomplishment. The average reading before the recession started was 100. Expectations improved, but not spending and hiring plans. Although, Main Street disinflation is disappearing, inventories are coming into balance, sales and profit trends are improving, although still negative. Washington remains obsessed with the notion that small banks will not lend money to “creditworthy” firms and that this is holding back employment and economic growth. Washington keeps inventing new programs to spur lending to small businesses, ignoring the fact that small business owners, for the most part, do not want a loan. If this was right, why such a minimal lending program? A $30 billion lending program for firms that produce half the private GDP and $60 billion for GM? Now that makes sense! A near record 52 percent of owners still claim they do not want a loan and only three percent claim that financing is their top business problem while 17 percent cite unreasonable regulations and red tape as their top issue. The President has ordered a review of regulations and support for entrepreneurship, but talk is cheap and small business has been the favorite target for such public relations rhetoric. But when action is required on issues like jobs, the President turns to GE, a large manufacturer with relatively few employees or promise of hiring more or to JP Morgan and other big banks now paying record bonuses once again (no “recession” on Wall Street!). This makes little sense. Federal, state and local governments have gone too far, arrogantly directing resources to unproductive purpose, engaging too many people in those activities and compensating them too well while promising too much. This has compromised the health of the economy and impaired its ability to grow. The financial crisis was at a minimum enabled by government, and most likely amplified by bad policies. Government is the problem. It will take time to clean-up this mess, but our future competitiveness and success depends on getting that task successfully completed.
This survey was conducted in January 2011. A sample of 10,799 small-business owners/members was drawn. One thousand nine hundred ten (2144) usable responses were recieved - 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.
