Small Business Economic Trends - September 2011

Bill Dunkelberg



Confidence in the future of the economy crashed in August, taking the Small Business Optimism Index down 1.8 points to 88.1. This was the sixth monthly decline in a row. The expansion is officially two years and two months old, but the small business half of the economy is still in the “tank”. Expectations for real sales growth and business conditions were the major contributors to the decline for the second month in a row


Fifteen percent (seasonally adjusted) reported unfilled job openings, up 3 points, suggesting that the unemployment rate could ease a fraction or remain unchanged. Over the next three months, 11% plan to increase employment (up 1 point), and 12 percent plan to reduce their workforce (up 1 point), yielding a seasonally adjusted 5% of owners planning to create new jobs, a 3 point gain over July. Welcome positive changes, but still leaving the two indicators at recession levels.


The frequency of reported capital outlays over the past 6 point months rose 2 points to 52% of all firms in August, the first improvement in many months. The percent of owners planning capital outlays in the next three to six months rose 1 point to 21%, 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. Five percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point and 3 points lower than January. The net percent of owners expecting better business conditions in 6 months was a negative 26%, down 11 points from July, and 36 percentage points lower than January.


The net percent of owners expecting higher real sales fell 10 points to a net negative 12% of all owners (seasonally adjusted), 25 points below January’s reading. This is bad news for hiring and inventory investment. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 1 percentage point, falling to a net negative 9%, more firms with sales trending down than up. A net negative 9% of all owners reported growth in inventories (seasonally adjusted), a 4 point improvement from July although still more owners are cutting inventory than adding. For all firms, a net 1% (up 1 point) reported stocks too low, a very satisfied reading based on survey history. Plans to add to inventories fell 2 points to a net negative 5% of all firms (seasonally adjusted), consistent with weak sales expectations and a poor economic outlook.


Seasonally adjusted, the net percent raising selling prices was 1%, down 6 points. The price surge that emerged on Main Street a few months ago has dissipated, taking the pressure off of the inflation measures. 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. Nineteen percent plan on raising average prices in the next few months, 5% plan reductions. Seasonally adjusted, a net 16% plan price hikes, down 3 points.


Reports of positive earnings trends were 2 points worse at a net negative 26% of all owners, not a pretty picture, but still one of the best readings in 43 months. With price hikes fading, compensation costs rising and sales trends still negative, there is little opportunity to improve the bottom line. Of those reporting negative sales trends, 45% blamed faltering sales, 5% higher labor costs, 15% higher materials costs, 3% insurance costs, 8% lower selling prices and 10% higher taxes and regulatory costs. Compensation costs are rising, but not at a rapid rate. Five percent reported reduced worker compensation and 15% reported gains yielding a seasonally adjusted net 9% reporting higher worker compensation, a 1 point decline. A seasonally adjusted 7% plan to raise compensation in the coming months, up a point from July.


The August survey was mailed out as Congress and the Administration reached their “deal” to curb spending and reduce the debt/deficit problems. Had this been a convincing one to “Main Street,” confidence would have improved and, likely, also spending and hiring. But, NFIB’s confidence measure took a dive as did the University of Michigan’s consumer confidence Index which produced its lowest reading since 1980. In particular, it was expected real sales gains and expected business conditions in 6 months that plummeted in the NFIB report. These two components by themselves lowered the Index 2.1 points versus the total loss from all 10 components of 1.8 points. With such a dim outlook, owners are not going to do a lot of hiring or expanding.

Business expansion, the purchase of new equipment and vehicles and even hiring are “long term” investments. Most important to the decision process is the sales forecast, but against expected sales over the life of an asset, the owner must figure in labor costs, taxes, the cost of new regulations, financing costs and the like to decide whether or not an “investment” will pay off. This is one reason why “short term” stimuli don’t work. The planning horizon for the private sector is longer than the time to the next election! At this point, no one knows what their tax rate will be 6 months from now; no one knows what the health care will do to labor costs. Higher for sure, but by how much? Yes, the President suspended costly EPA rules that were going into effect, but you know that they will be back after the election if he wins

The NLRB is pushing the union agenda, card check, mandating owners to post notices of the right to unionize, interfering with Boeing’s business decision making (and the President’s Chief of Staff was on Boeing’s board when the South Carolina project was approved). Supporters of the Administration are pushing for another hike in the minimum wage and the new CEA chairman favors and wants a national sales tax to be imposed. It would take a book to itemize it all. Short-term fixes will not help, private sector decision makers think longer term – they do and they don’t like what they see, there is little clarity or certainty. Consumer spending is still a key factor and 9 of 10 people who want a job still have a job and would spend more if they were more confident about the future.

This survey was conducted in August 2011. A sample of 3,938 small-business owners/members was drawn. Nine hundred twenty-six (926) usable responses were received – a response rate of 24 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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