Small Business Economic Trends - March 2009

Bill Dunkelberg


Optimism Index

The Index of Small Business Optimism fell 1.5 points to 82.6 (1986=100), still the second lowest reading in the 35 years history of the NFIB survey.

Labor Markets

Seasonally adjusted, the decline in average employment per firm over the past three months was the largest in survey history. Seasonally adjusted 9 percent of the owners increased employment, but 24 percent reduced employment. Eleven (11) percent (seasonally adjusted) reported unfilled job openings, unchanged from February and a positive sign. Employment plans also showed some improvement from January's hiring plans with a seasonally adjusted net-negative 6 percent of owners planning to create new jobs. That figure is three points better than January, but still historically very low. The only lower reading occurred in the 1974-75 and the the 1980-82 recession periods. In addition to reducing employment, owners are pulling back on compensation, and a record low 11 percent reported raising employee compensation.

Capital Spending

There was a slight uptick in capital spending last month. after falling five points in dEcember and flattening in January, the frequency of reported capital outlays over the past six months was up a point at 52 percent of all firms after months of decline. Owners continue to defer any project not essential to the survival of the firm. Consequently, loan demand is lower. Plans to make capital expenditures over the next few months fell one point to 18 percent, historically very low. Three percent characterized the current period as a good time to expand, down three points from January, a reading much worse than those registered in the 1990-91 recession. A net-negative 21 percent expect business conditions to improve over the next six months, nine points lower than January.

Inventories and Sales

The percent of all owners (seasonally adjusted) reporting higher sales in the past three months improved three points, rising to a net-negative 28 percent, up a bit from the worst reading in survey history, but grim from every other perspective. Expectations for gains in real sales gave up nine points falling to a net-negative 29 percent who are expecting improvements - the worst reading in survey history. Small business owners continued to liquidate inventories. A net-negative 19 percent of all owners reported gains in inventory stocks. This is two points better than December, but down a point from January. A net-negative 5 percent (a one-point improvement) reported stocks too low (seasonally adjusted). Inventories are being slashed, in part to match up to terrible expectations for real sales growth and have been for months.


Massive price cutting is also being used to accomplish inventory reduction. In July of 2008, a net 32 percent reported raising average selling prices. Through February, the net percent of owners raising prices has declined 56 points to a negative 24 percent of all owners. This plunge in only three quarters is almost as large as the 13 quarters it took to accomplish the same magnitude of disinflation in the early 1980s. Twelve (12) percent reported raising average selling prices, down three points, and 33 percent reported lower selling prices, up five points from January (not seasonally adjusted). The percent of owners citing inflation as their No. 1 problem was unchanged at 6 percent. In July, 20 percent cited inflation as their single most important problem, so inflation is fading as a concern for owners, replaced by worries over declining sales. Plans to raise prices fell one point to a net-seasonally-adjusted 1 percent of owners, 37 points below the July reading.

Profits and Wages

Reports of positive trends improved three points to a net-negative 44 percentage points, three points better than the 35-year record low reached in January. A year ago, reports of positive profit trends were 19 points better. Not seasonally adjusted, 11 percent reported profits higher (up one point), but 59 percent reported profits falling (up one point). Pricing power has vanished and reports of sales declines are at record high levels (although a bit better than January). Wage pressures are falling, providing some positive support to the bottom line. Of those reporting lower earnings compared to the prior three months. 59 percent cited weaker sales, 19 percent cited higher materials costs, including energy, 7 percent blamed lower selling prices, 19 percent mentioned higher compensation costs, and higher labor costs, and 2 percent cited insurance costs.

Credit Markets

As the economy weakens, loan demand fades as fewer capital projects are planned and inventory investment falls. Thirty-six (36) percent reported regular borrowing, up one point from January - 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-two (32) percent reported all their borrowing needs met (down one point) compared to 8 percent who reported problems obtaining desired financing (unchanged; data are not seasonally adjusted). The net percent reporting all borrowing needs satisfied fell a point to 24 percent (the low for the series is 22 percent, reached in 1993 when the question was first asked). The net percent of owners reporting loans harder to get was unchanged at 13 percent of all firms, one point higher than the expansion high reached in 1991. No credit crunch has appeared to date beyond the normal cyclical tightening of credit. The net percent of owners expecting crdit conditions to ease in the coming months was a seasonally adjusted net-negative 16 percent, two points worse than January's reading.


Two characteristics of the economy that, historically, are alleged to be the transmitters of financial market disruptions to the real economy are "sticky wages" and "sticky prices," the inability of business owners to be able to adjust nominal prices and wages in ways that insulate real output and employment from financial market turbulence (whether caused by the Federal Reserve or other shocks). Rigidity is a "core belief" in the Keynesian explanation of recessions. This prevents real wages from adjusting fast enough to equate supply and demand. Union contracts and minimum wages, etc. produce such rigidities as do longer term contracts (futures) regarding prices or legal agreements. Classical economist argue that a major cause of unemployment is a mismatch between labor supply and demand (e.g. lots of auto workers are available for work but the need for more workers is not in Michigan) and no matter how low wages go, they can not find jobs there. This kind of "mis-match" takes time to resolve.

Well, prices and wages are being cut with unprecedented frequency, suggesting that firms are adjusting employment and related costs much more quickly than was historically the case while moving with alacrity to rid the shelves of excess inventory. The reduction in price raising activities that took over three years to unwind in the early 1980s has been accomplished in nine months. One interpretation of this is that we are getting the job done more quickly, shortening the time until a bottom is reached. A concener, 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 Keynesian depression with widespread business failures and consumer bankruptcies. Certainly record reports of declining profits reinforce this concern.

Consumers are saving (finally) and those with a job are seeing their real incomes rise as prices fall. Hopefully, they wills ee past the deluge of dire warnings from Washington, D.C. and New York and take advantage of low prices and interest rates. Measures of consumer sentiment confirm that they are scared. The economic  weakness is not caused by reduced spending from those losing jobs, but reduced spending from everyone who has a job, 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've been in a recession over a year and Congress has yet to get new spending of any meaningful size injected into the economy. 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 February 2009. A sample of 3938 small-business owners/members was drawn. Eight hundred five (805) usable responses were received - a response rate of 22 percent.

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

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