Small Business Economic Trends - May 2010

Bill Dunkelberg


Optimism Index
The Index of Small Business Optimism gained 3.8 points, rising to 90.6, barely exceeding the "90 barrier." Pessimism persists but the Index is finally out of the 80s, at least for one month. The April Index ended seven straight quarters of under 90 readings - a pyrrhic victory considering the mound of obstacles heading down Main Street from Washington, D.C. There is nothing magical about entering the 90s, other than in comparison to the 1980-82 period when only one quarterly reading fell below 90. While nine of the 10 Index components rose and one was unchanged from March, job creation and capital expenditure plans have not recovered. These gains are not enough to establish that a solid recovery is underway.

Labor Markets
Average employment per firm first turned negative in April 2007. It has been negative for 10 of the last 12 quarterly readings ending with a negative 0.18 in April 2010 (seasonally adjusted). Current job openings are also at low leels. Eleven (11) percent (seasonally adjusted) of small business owners reported unfilled job openings in April, up two points but historically very weak. The net percent of owners increasing employment in the last three months fell one point to a net negative 12 percent.

Capital Spending

The frequency of reported capital outlays over the past six months rose one point to 46 percent of all firms, two points above the 35 year record low. Plans to make capital expenditures over the next few months were unchanged at 19 percent, three points above the 35 year record low. Four percent characterized the current period as a good time to expand facilities, up two points from March. A net zero percent expect business conditions to improve over the next six months, up eight points from March.

Inventories and Sales
The net percent  of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved 10 points to a net negative 15 percent, still negative but a huge improvement. It is the best reading since September 2008. The net percent of owners expecting real sales gains gained nine points, increasing to six net percent of all owners (seasonally adjusted). Small business owners continued to liquidate inventories, and weak sales trends gave little reason to order new stock. A net negative 18 percent of all owners reported gains in inventories, 10 points better than December's record liquidation reading. Plans to add to inventories improved five points to a net negative two percent of all firms (seasonally adjusted).

The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative 11 percent, a nine point increase in the net percent raising prices. Certainly in the near-term, inflation is not a risk. Plan to raise prices rose four points to a net seasonally adjusted 13 percent of owners. On the cost side, four percent of owners cited inflation as their number one problem (e.g. costs coming in the "back door" of the business) and only four percent cited the cost of labor, so neither labor costs nor materials costs are pressuring owners.

Profits and Wages
Reports of positive profit trends improved by 12 points in April, registering a net negative 31 percentage points (still 27 points worse than the best expansion reading reached in 2005). The persistence of this imbalance is bad news for the small business community. Profits are important for the support of capital spending and expansion. For those reporting lower earnings compared to the previous three months (51 percent, down seven points) 57 percent cited weaker sales, four percent blamed rising labor costs, six percent higher materials costs, two percent higher insurance costs, and six percent blamed lower selling prices. Six percent blamed taxes and regulatory costs. Owners continued to hold the line on compensation, with eight percent reporting reduced worker compensation and 12 percent reporting gains. But the April figures do suggest that owners are starting to raise compensation, even if only a bit. Seasonally adjusted, a net three percent reported raising worker compensation, only five points better than February's record low reading of negative two percent. However, labor costs still appear to be under control, one of the major factors affecting inflation pressures.

Credit Markets
Regular NFIB borrowers, 31 percent (a record low) accessing capital markets at least once a quarter, continued to report difficulties in arranging credit. A net 14 percent reported loans harder to get than in their last attempt, down one point from March. Overall, 91 percent of the owners either reported all their credit needs met or they did not want to borrow. Credit may be harder to get, but it is available to many who complain that terms are tougher than they were a few years ago. Only four percent of the owners reported "finance" as their top business problem (down one point). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities. The percent of owners reporting higher interest rates on their most recent loan was six percent, while two percent reported lower rates. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 15 percent (more owners expect that it will be "harder" to arrange financing), an improvement of one ponit over March.


Well, the Index avoided a string of eight quarterly readings below 90 by a meager 0.6 points. Restated, we have eight quarterly reading below 91, either way it is ugly and there was only one reading in the 1980-82 period that was lower, although its second quarter was close at 91.7. After the economy bottomed in the fourth quarter of 1982, the Index rose from 95 to over 105 in two quarters and stayed above 105 for six quarters. Assuming that th emost recent recession bottomed in the third quarter of 2009, the Index has remained depressed and Gross Domestic Product (GDP) growth has averaged less than half of that experienced in the 1983 recovery period. Perhaps this weaker recovery is a result of the fact that small businesses are not participating.

Reporte capital spending and plans to make outlays are at historic low levels. Looks like no money gets spent unless something breaks or the roof leaks. Owners are very satisfied with current inventory stocks but do not plan to add aggressively, apparently because they are not very optimistic about the course of future sales and business conditions. The percent of owners reporting "weak sales" as their top problem did drop five points, but 29 percent still see this as their major challenge.

Credit? Washington continues to play this card as a major cause of the slow paced recovery. From 2003-07 we proved we could generate a lot of jobs by making bad loans in the housing boom, a mistake we should not repeat. The media sites examples of firms that are turned down, most frequently is seems, construction-related firms. But now we are over-built and lenders do not see financing more homes or strip malls as good projects. On top of that, consumer spending crashed. Ninety-one (91) percent of the owners said they got all the credit they wanted (or did not want any), only four percent said credit was their top business problem. Regular borrowers did report credit "hard or harder" to get, but that should be no surprise. So with capital spending, inventory investment and hiring plans at record lows, there is little credit demand.

Jobs? The economy posted a gain of 290,000, but 100,000 were health and social services, education and government. We need at least 125,000 to stay even with population growth and another 325,000 a month if we want to re-employ the eight million that lost theirs jobs in the recession. That's 450,000 new jobs every month for three years, a tall order. Small business is th emajor job producer and currently is not in the mood to create new jobs. More firms still plan to reduce employment than to add new workers and historically low 11 percent report job openings. Uncertainty is the enemy and Washington is a major source of uncertainty for business owners. Congress continues to advance legislation that is an anathema to business. Surprises like the 1099 requirement in the Health Care Bill continue to concern owners and threats of a VAT are truly disconcerting since it is so expensive and intrusive. The list goes on. Bottom line, the recovery will be sub-par in comparison to the recoveries we experienced following past recessions such as the one in 1980-82.

This survey was conducted in April 2010. A sample of 10,799 small-business owners/members was drawn. Two thousand one hundred fourteen (2114) usable responses were received - a response rate of 20 percent. 

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2010, the NFIB retains ownership. All Rights Reserved.

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