Small Business Economic Trends - June 2012

Bill Dunkelberg



The Optimism Index was basically unchanged in May at 94.4, down 0.1 points. A reading of 94.4 is historically low and consistent with the sub-par performance of GDP and employment growth. The individual indicators were mixed, with expected sales in a three month decline. However, some employment components improved and profit trends remained relatively stable after its sharp gain in April.


Fifty-one (51) percent of the owners hired or tried to hire in the last three months and 37 percent (73 percent of those trying to hire or hiring) reported few or no qualified applicants for positions. The figures suggest that job creation was very weak and for some owners, fining workers for the positions they do have is a challenge. The percent of owners reporting hard to fill job openings rose 3 points to 20 percent, the highest reading since June, 2008. This indicates that labor markets are tightening overall, either because labor demand is quietly rising or potential workers continued to leave the workforce. Overall, there was little improvement in the numbers to suggest that job creation would pick up a lot of steam anytime soon. But job creation will remain positive, just anemic.


The frequency of reported capital outlays over the past 6 months rose 1 point to 55 percent, 11 points above the historic low last reached in August 2010, but still below readings from the first half of 2008. In 2007, an average of 60 percent reported making capital outlays. So, it appears that spending remains more in “maintenance” than in “expansion” mode.


The percent of owners planning capital outlays in the next 3 to 6 months declined 1 point to 24 percent, still well below “normal” but improving. Only seven percent characterized the current period as a good time to expand facilities (seasonally adjusted), unchanged. The net percent of owners expecting better business conditions in 6 months was a negative 2 percent (a 3 point improvement), better, but still more owners expecting the economy to deteriorate than looking for improvement.


Seasonally adjusted, the net percent raising selling prices was 3 percent, down 5 points from April. There is not much pressure on prices coming from Main Street, good news for the Fed. Twenty (20) percent plan on raising average prices in the next few months (down 5 points), 4 percent plan reductions. Seasonally adjusted, a net 17 percent plan price hikes, down 6 points. Clearly, many owners do not see demand as strong enough to support higher selling prices.


Reports of positive earnings trends gave up 3 points, falling to a negative 15 percent in May, still the second best reading since October, 2006. Profits are the major source of capital for financing hiring and expansion for small firms, making this a very welcome development. Four percent reported reduced worker compensation and 21 percent reported raising compensation, yielding a seasonally adjusted net 16 percent reporting higher worker compensation (up 2 points), the highest reading in 43 months. A net seasonally adjusted 9 percent plan to raise compensation in the coming months, unchanged from April. With more firms raising compensation (a net 16 percent) than raising selling prices (a net 3 percent), earnings will start to come under pressure unless sales grow without the need to add a lot of new workers or capacity.


Ninety-one (91) percent of all owners reported that all their credit needs were met or that they were not interested in borrowing. Twenty-nine (29) percent reported all credit needs met, nine percent reported that not all of their credit needs were satisfied (the record low is 4 percent, reached in 2000), and 47 percent said they did not want a loan (62 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only 3 percent reported that financing was their top business problem, compared to 22 percent citing taxes, 20 percent citing weak sales and 19 percent naming unreasonable regulations and red tape.


The Index did not go down by much, that’s the good news. The May reading is still at recession levels from an historical perspective, consistent with very anemic Gross Domestic Product (GDP) and employment growth. The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health care costs, regulatory compliance costs, all of which are very uncertain, meaning that owners cannot make reliable estimates of what will happen to these factors. Most of this uncertainty is coming out of Washington, D.C. Owners can’t attach probabilities to outcomes or even decide which outcomes to consider.

The amount of political manipulation and evasion to guide the spending of billions of taxpayer dollars is disturbing to owners. Sixty (60) percent of those surveyed said now is a bad time to expand their businesses; one-in- four of those owners cited political uncertainty as the main reason, second only to concerns about a weak economy. Investing in jobs or plant and equipment will remain at “maintenance” level until this is resolved.

The Index averaged 100 from 1973 to the end of 2007, but has averaged 90 since then, over five years of below average performance. Over ten questions in the Index, net positive responses would have to be 100 points higher just to get back to the average. In a recovery, it should be posting above average readings.

Developments in Europe probably have their most damaging impact on the economy through adversely impacting uncertainty and expectations. A financial meltdown there will translate into less confidence in our ability to support the U.S. banking system even though direct exposure is not large. Capital flight from European asset investments will roil U.S. markets. There will be lots of financial news and speculation. On the real side, if Europe does slip into a broader and deeper slowdown, exports will be adversely impacted.

The April gains in the employment, sales and profits indicators did hold up pretty well in May, a comforting sign. Inflation is clearly not a problem; reported interest costs are a tad lower. But expectations for business conditions and sales remain weak and those drive decisions to hire and invest.

This survey was conducted in May 2012. A sample of 3,938 small-business owners/members was drawn. Eight hundred nineteen (681) usable responses were received – a response rate of 17 percent.

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.

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