Small Business Economic Trends - September 2009

Optimism Index
The Index of Small Business Optimism gained 2.1 points in August, rising to 88.6 (1986=100), 7.6 points higher than the survey's second lowest reading reached in March. Seven of the 10 Inde components posted gains or were unchanged, three declined. The gain was primarily a result of improved expectations for future business conditions and real sales volumes. The gain in the Optimism Index clearly signals that the worst is likely over, but so far there has been no "surge" in sentiment or in the important Index components directly tied to the Gross Domestic Product.

Labor Markets
The "job generating machine" is still in reverse. Eight percent (seasonally adjusted) reported unfilled job openings, down one point from July. Over the next three months, 13 percent plan to reduce employment (down one point), and seven percent plan to create new jobs (down one point), yielding a seasonally adjusted net zero percent of owners planning to create new jobs, a three point improvement over July. Reports of compensation cuts and increases remained in record territory, with 10 percent reporting reduced worker compensation, and 12 percent reporting increased worker compensation. Seasonally adjusted, a net six percent reported raising worker compensation, unchanged from July and only three points above June's record low reading.

Capital Spending
Plans to make capital expenditures over the next few months fell two points to 16 percent, revisiting the survey record low reached in 1975 and in March of this year. Five percent characterized the current period as a good time to expand facilities, unchanged from July and historically very low. But, a net 10 percent expect business conditions to improve over the next six months, up 13 points from July. The frequency of reported capital outlays over the past six months fell one point to 45 percent of all firms, a record low reading (data first collected in 1979).

Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher sales int he past three months remained negative at minus 27 percent, but seven points better than the record low set in March and revisited in July. Expectations for gains in real sales rebounded, gaining six points from the July reading to a net negative five percent expecting improvements. Although still negative, this latest rebound in expectations is 26 points better than the March record low level. Small business owners continued to liquidate inventories. A net negative 24 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), three points better than the record low of negative 27 recorded each month from April through June.

Inflation
In August, 11 percent of small business owners reported raising their average selling prices, while 31 percent reported reductions in average selling prices (both unchanged). No inflation in those numbers. Seasonally adjusted, the net percent of owners raising prices was a negative 19 percent, far more cutting prices than raising them. Plans to raise prices rose three points to a net seasonally adjusted eight percent of owners, 30 points below the July 2008 reading. Pricing power has vanished and reports of sales declines are exceptionally high in part because of the widespread price cuts.

Profits and Wages
Reports of positive profit trends improved five points to a net negative 40 percentage points. Not seasonally adjusted, 16 percent reported profits higher (up three points), but 50 percent reported profits falling (down two points). Of those owners reporting lower earnings compared to the previous three months, 62 percent cited weaker sales. The fact that these negative reports persist is bad news for the small business community. Wage pressures are falling as owners not only reduce employment but also the compensation of remaining workers. But the cost reductions are not enough to firm up profits. Ten percent of the owners reported reducing worker compensation, a near record high. Only 12 percent reported raising worker compensation, a point above the survey record low reached in the last few months. Seasonally adjusted, a net six percent reported raising compensation, unchanged from July but a few points above the June record low reading of three percent.

Credit Markets
Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending. Thirty-two (32) percent reported regular borrowing, down one point from July. Of those borrowers, 30 percent reported all their borrowing needs met (up two points) compared to seven percent who reported problems obtaining desired financing (down three points). The recession is now 21 months old, much longer than any other time since the 1980-82 period, so more "stress" is likely as owners wait for customers to show up and for their cash flow to improve. The net percent of owners reporting loans harder to get fell one point to 14 percent of all firms. But only four percent of the owners reported "financing" as their number on business problem. Pre-1983, as many as 37 percent cited financing and interest rates as their top problem.

COMMENTARY

It looks like the third quarter will turn out a bit better than we predicted last year. At the time, our forecast was quite optimistic. Most everyone seems to be revising up, even past the NFIB forecast. But the NFIB data confirm that the fundamentals are still weak. "Cutting" is starting to diminish, but "adding" has not picked up in jobs, inventories or capital spending. Only one month left to make Q3 but as we learned from Septembers in 2007 and 2008, Septembers can bring major shifts - down and hopefully up.

The small business sector has taken a real beating. Owners have reduced employment and cut inventories at a record pace, and capital spending (plans and actual) reached 35 year lows this year. Clawing their way back requires some cooperation from consumers, the source of sales for most small firms, and they are not in a spending mood. For many consumers, debt burdens have restrained spending. For higher income consumers, psychology is playing a negative role - wealth losses have shocked them into reduced spending.

Capital expenditures are at record low levels. So are plans to make outlays in the next three months. Plans to invest in inventories are at the third lowest level in survey history, but have been at that level for a long period of time. Inventory reductions have been running at new record levels for a year. Reports of sales declines are running at record levels (price cuts part of the cause, lower real unit sales as well) and this has produced reports of profit declines at record rates. It is looking like the worst period in survey history, worse in many ways that the 1980-82 period which had a "relief growth rally" in the middle of its 22 month span.

Political leadership has also had a negative impact on attitudes. For years, owners have expressed a vote of "no confidence" in the economic policies of Congress. From September 2008 through June 2009, leadership has been unconvincing, appeared confused, and unable to act in a way that engendered confidence from the private sector. The Stimulus Package contained very little current stimulus and Congress has continued to pursue major legislative changes that promise to be less than business or consumer friendly. Taxes, Taxes, Taxes, Regulations, Regulations, Regulations. Deficits, larger and deeper. Depressing.

With all that, the private sector is slowly climbing its way back, pent up demand is huge (even without the credit driven levels of spending from the expansion). Consumers are slowly rebuilding their financial foundations and spending will recover, albeit slowly. In the long haul, the relationship between consumption and spending is fairly stable. We used credit to "over-consume," now we will repay the debt and "under-consume" for a spell. The attempts by Congress to "steam roll" the private sector are being repelled by ordinary folk and politicians who have faith in the private sector, not government. This is contributing to an improvement in expectations for economic performance. Real sales volumesa nd business conditions are expected to improve, let's hope that owners follow up with an increase in their spending and hiring.

This survey was conducted in August 2009. A sample of 3,938 small-business owners/members was drawn. Eight hundred eighty-two (882) usable responses were received - a response rate of 22 percent. 

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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