Small Business Economic Trends - October 2011

Bill Dunkelberg



The Index of Small Business Optimism gained 0.8 points ending a six month decline, but about the only good thing to say about it is that the Index didn’t go down. The net percent of owners expecting real sales to improve became less negative by 6 points, “rising” to a negative 6 percent. The net percent of owners expecting better business conditions in six months “rose” 4 points to a negative 22 percent, not exactly a euphoric development.


September was another bad job creation month. Fourteen (14) percent (seasonally adjusted) reported unfilled job openings, down 1 point. Over the next three months, 11 percent plan to increase employment (unchanged), and 12 percent plan to reduce their workforce (unchanged), yielding a net seasonally adjusted 4 percent of owners planning to create new jobs, a 1 point loss from August. In a normal expansion, this Index component would have double digit readings.


The frequency of reported capital outlays over the past six months fell 2 points to 50 percent of all firms where it has been stalled for several years. The record low of 45 percent was reached in July 2010. The percent of owners planning capital outlays in the next three to six months fell 1 point to 20 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. Six percent characterized the current period as a good time to expand facilities (seasonally adjusted), up 1 point but 2 points lower than January. The net percent of owners expecting better business conditions in six months was a negative 22 percent, up 4 points from August, but 32 percentage points lower than January.


The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 1 point, falling to a net negative 10 percent, more firms with sales trending down than up. The net percent of owners expecting higher real sales gained 6 points to a net negative 6 percent of all owners (seasonally adjusted), 19 points below January’s reading but 6 points better than August. A net negative 11 percent of all owners reported growth in inventories (seasonally adjusted), 2 points worse than the August reading. For all firms, a net negative 1 percent (down 2 points) reported stocks too low. Stocks are not excessive, but with pessimistic sales expectations, there is no need to order more of anything. Plans to add to inventories gained 3 points, to a net negative 2 percent of all firms (seasonally adjusted), so more firms still plan reductions than plan additions.


Seventeen (17) percent of the NFIB owners reported raising their average selling prices in the past three months (down 2 points), and 22 percent reported price reductions (up 3 points). Seasonally adjusted, the net percent raising selling prices was 6 percent, up 5 points. 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, but there is still some pressure on prices as some firms are making price hikes stick. Seventeen (17) percent plan on raising average prices in the next few months, 4 percent plan reductions. Seasonally adjusted, a net 14 percent plan price hikes, down 2 points.


Reports of positive earnings trends were 1 point worse in September at a net negative 27 percent of all owners, not a pretty picture, but still one of the best readings in years. Not seasonally adjusted, 17 percent reported profits higher (down 3 points), and 40 percent reported profits falling (unchanged). Corporate profits are at a record high level as a share of GDP, but the story is very different on Main Street. Compensation costs are rising, but not at a rapid rate. Six percent reported reduced worker compensation and 14 percent reported gains yielding a seasonally adjusted net 8 percent reporting higher worker compensation, a 1 point decline. A net seasonally adjusted 7 percent plan to raise compensation in the coming months, unchanged from August.


After a strong vote of “no confidence” in the effectiveness of the deal made between Congress and the President, pessimism continued to prevail. The Small Business Optimism Index gained 0.8 points (virtually no change) based on a reduction in the pessimism of sales prospects and expected business conditions, both of which remain solidly negative.

Consumer confidence (University of Michigan survey) barely budged from the August reading, the lowest since 1980. And disagreement with Administration policies continued at record levels among U.S. households. It was a loss of confidence that caused consumers to cut spending in 2008Q4, plunging the economy into a deep recession as the U.S. population raised the saving rate from 1 to 6 percent causing a reduction in spending of half a trillion dollars at annual rates. And, with no confidence in government policies today, 131,000,000 employed consumers who could spend more do not because they fear the future. Since these workers are very concerned about our inability to get spending and debt under control and restore growth, promises to have even more “stimulus” will increase the level of concern for most if not all of these workers will spend less, not more. If consumers fear the path we are on, then “less is more,” policies that reduce the size of government will increase confidence.

For those who are unemployed, the President’s jobs program will be very ineffective if enacted. Promising temporary tax cuts financed by permanent income tax increases will not play well, especially for small business owners who pay taxes based on personal, not corporate tax rates. “Saving school teachers, police and fire fighters” is the cover the President uses to justify hundreds of millions in new gifts (from taxpayers!) to state governments. This doesn’t “create” jobs and only some of those jobs “saved” will be police and fire fighters and teachers, who are often funded at the community level. A very misleading ploy to save jobs of union workers. And building roads and bridges will not re-employ the tens of thousands of residential construction workers as the President would have you believe. The skill sets are not well matched and government programs generally require union workers so most small construction firms will not qualify.

In addition, tax breaks for hiring are similarly misdirected. If an owner can’t justify hiring a worker now, getting a tax break of a few thousand dollars will not change the math. The credit only lasts a year, then the full cost of the worker is on the firm. If an added employee can not “pay its way” with added value before the cut, why would this tax change alter the math? Twenty-eight (28) percent said “poor sales” was their top business problem and the tax break doesn’t change that. Better to use the tax “gift” to keep the firm operating for those who are currently employed at the firm.

This survey was conducted in September 2011. A sample of 3,938 small-business owners/members was drawn. Seven hundred twenty-nine (729) usable responses were received – a response rate of 19 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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