Small Business Economic Trends - November 2011

Bill Dunkelberg




The Index of Small Business Optimism gained 1.3 points, nudging the Optimism Index up to 90.2, below the year-to-date average of 91.1 and only slightly better than the average since January 2009 of 89.1. As was the case in September, the “gain” in the Index was primarily a result of less negative views about the prospects for real sales and business conditions. Hardly the basis for strong economic growth.



NFIB owners reported an overall reduction in employment for the 5th month in a row posting an average reduction of 0.1 workers per firm in the October survey. Seasonally adjusted, 12 percent of the owners added an average of 3.1 workers per firm over the past few months, but 11 percent reduced employment an average of 3.9 workers per firm, better than September but not good enough to address the unemployment problem. Fourteen (14) percent (seasonally adjusted) reported hard to fill job openings (unchanged). Over the next three months, 9 percent plan to increase employment (down 2 points), and 12 percent plan to reduce their workforce (unchanged), yielding a seasonally adjusted net 3 percent of owners planning to create new jobs, down 1 point from September and 2 points below August. In a decent expansion, this should exhibit double digit readings.



The frequency of reported capital outlays over the past 6 months rose 2 points to 52 percent. The record low of 44 percent was reached in August 2010. Of those making expenditures, 36 percent reported spending on new equipment (up 1 point), 18 percent acquired vehicles (up 1 point), and 13 percent improved or expanded facilities (unchanged). Five percent acquired new buildings or land for expansion (down 1 point) and 11 percent spent money for new fixtures and furniture (up 2 points). These numbers have not changed all year, “range bound” around current levels. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 21 percent, a recession level reading that has typified the recovery to date. Money is available, but most owners are not interested in a loan to finance the purchase of equipment they don’t need. Seven percent characterized the current period as a good time to expand facilities (seasonally adjusted), up 1 point but still lower than January’s reading.

The net percent of owners expecting better business conditions in 6 months was a negative 16 percent, 6 points better than September, but still 26 percentage points lower than January. A net negative 4 percent of all owners expect improved real sales volumes, 26 percent report “poor sales” as their top business problem. Clearly not an environment for making investment bets on economic growth.



The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 2 points, falling to a net negative 12 percent, more firms with sales trending down than up. Twenty-six (26) percent of the owners indicated “poor sales” as their top business problem, not surprising with the frequency of reported weaker sales trends. This is not a level of economic activity that will support job creation. The net percent of owners expecting higher real sales gained 2 points to a net negative 4 percent of all owners (seasonally adjusted), 17 points below January’s reading. This is bad news for hiring and inventory investment. A net negative 10 percent of all owners reported growth in inventories (seasonally adjusted), 1 points better than the September reading. Current sales (which are weak) are often being met by reducing stocks, not by ordering new inventory. For all firms, a net 0 percent (up 1 point) reported stocks too low, still a “satisfied” reading based on survey history. Stocks are not excessive, but with pessimistic sales expectations, no need to order more. Plans to add to inventories gained 2 points, but to a net 0 percent of all firms (seasonally adjusted), no stimulus from inventory investment, consistent with weak sales expectations and a sour outlook for future business conditions.



Seasonally adjusted, the net percent raising selling prices was negative 1 percent, down 7 points from September. The continued weakness in sales trends has blunted small business’s ability to raise prices after two years of price cutting to liquidate excess inventories. Eighteen (18) percent plan on raising average prices in the next 3 months, 5 percent plan reductions yielding a seasonally adjusted net 14 percent planning price hikes, unchanged from September.



Reports of positive earnings trends were a point better in October at a net negative 26 percent of all owners, not a pretty picture, but still one of the best readings in years. Compensation costs are rising, but not at a rapid rate. Seasonally adjusted, a net 7 percent reporting higher worker compensation, a 1 point decline. A seasonally adjusted 8 percent plan to raise compensation in the coming months, up 1 point.


Four percent reported financing as their #1 business problem. Nine percent reported that not all of their credit needs were satisfied (the record low is 4 percent, reached in 2000). Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point and only 2 points above the record low. A net 11 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 1 point. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 11 percent (more owners expect that it will be “harder” to arrange financing than easier), a 1 point improvement over September.


Consumer spending improved a bit last quarter but prospects for future spending are still dismal. Consumer confidence posted only marginal gains over the last few months and confidence in economic policies remains at 50 year record low levels according to the University of Michigan’s consumer confidence survey where only 7% of household heads approve.



In addition to the uncertainty surrounding Washington’s economic policies, the “Greek plunge” also looms as an economic threat. Yes, the U.S. can print money to pay our sovereign debt but the Greeks can’t. Although printing money comes with its own set of problems, namely inflation. So it’s up to the Greeks and the E.U. figure out a solution. All of this uncertainly and dismal consumer sentiment does nothing to spur small business hiring and confidence, and the latest NFIB survey reflect this sentiment.



From the perspective on Main Street, the Federal Reserve is “out of bullets”, not much it can do to reduce unemployment. It can’t lower loan rates at most banks as floor rates are in effect and nobody wants to borrow as there are few investment opportunities in people or equipment – no payoff with a lousy economy. The average rate reported on short-term money has been stuck around 6 percent for years now. The Federal Reserve has given it its best.



Adding insult to injury, the U.S. fiscal policy is still in disarray. All that is proposed is higher spending, more regulations and increased taxes to support them. The President’s jobs bill is poorly constructed as the “incentives to hire” are ineffective. Giving owners a temporary tax cut which are funded by permanent tax increases doesn’t mean they will use the proceeds to hire workers that can’t add enough value to cover their salaries.



Washington seems to be avoiding the most important problems, namely the entitlement programs, that affect our out of control debt. Observers have continually warned about the bad ending that awaits those who live beyond their means creating the debt super-cycle. If this recession is not the ugly end predicted, it is certainly a warning of what will come if we don’t change our ways.

This survey was conducted in October 2011. A sample of 10,799 small-business owners/members was drawn. Two thousand seventy (2077) usable responses were received – a response rate of 189 percent.

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2011, the NFIB retains ownership. All Rights Reserved.












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