Small Business Economic Trends - May 2011

Bill Dunkelberg


The Small Business Optimism Index fell 0.7 points in April to 91.2, not much but still a disappointing outcome following the March decline. After last month’s larger decline, this month is more akin to an “after shock”. Thankfully, the labor market components did not decline further, although net job creation weakened. Also, fewer reported adverse profit trends and reports of positive sales trends were still less frequent than reports of quarterly declines, but the best reading since December 2007, the peak of the last expansion.

Fourteen (14) percent (seasonally adjusted) reported unfilled job openings (down 1 point). Over the next three months, 16 percent plan to increase employment (down 2 points), and 6 percent plan to reduce their workforce (unchanged), yielding a seasonally adjusted net 2 percent of owners planning to create new jobs, unchanged from March but a very weak reading.

The frequency of reported capital outlays over the past six months fell 1 point to 50 percent of all firms. Of those making expenditures, 35 percent reported spending on new equipment (up 1 point), 18 percent acquired vehicles (up 1 point), and 11 percent improved or expanded facilities (down 1 point). Three percent acquired new buildings or land for expansion (down 1 point) and 11 percent spent money for new fixtures and furniture (unchanged). Capital spending remains historically low in spite of very low interest rates and all sorts of expensing incentives. The problem is that “cheaper” equipment is still no bargain if you can’t use it. The percent of owners planning capital outlays in the next three to six months fell 3 points to 21 percent, a recession level reading. Money is cheap, but most owners are not interested in a loan to finance equipment they don’t need. Prospects are still uncertain enough to discourage any but the most profitable and promising investments. Four percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point from March and 4 points lower than January. The net percent of owners expecting better business conditions in 6 months slipped another 3 points to negative 8 percent, 18 percentage points worse than in January. Uncertainty is the enemy, and there is plenty of it to convince owners to “keep their powder dry”. Apparently consumers feel much the same way, as more customers spending more money would overcome the reluctance of owners to hire and make capital outlays. One in four still cite “weak sales” as their top business problem.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months did improve by 7 percentage point to a net negative 5 percent, the best reading in 40 months. But consumer sentiment is stuck in the mud as gas and food prices continue to rise, and many consumers still suffer from heavy debt and mortgage payments which depress their spending. The net percent of owners expecting higher real sales fell 1 point to a net 5 percent of all owners (seasonally adjusted), 8 points below January’s reading. This is bad news for hiring and inventory investment. A net negative 9 percent of all owners reported growth in inventories (seasonally adjusted), a 2 point deterioration. Small business owners continued to liquidate inventories but at one of the lowest frequency in 35 months. For all firms, a net 1 percent (up 2 points) reported stocks too low, historically one of the most “satisfied” readings in survey history. Owners are happy with current stocks, but that is relative to expected sales which are not strong. Plans to add to inventories lost 2 points, falling to a net negative 1 percent of all firms (seasonally adjusted), consistent with the strong reading on satisfaction with current stocks.

In April, the percentage rose to 12 percent, a gain of 36 percentage points from the low reading in 2009 and, a more recent perspective, 23 points higher than last September. A net 24 percent planned hikes in average selling prices in April. The “fire sale” is over and selling prices are now on the rise, giving a boost to profit trends in April (although much more is needed).

Reports of positive earnings trends improved 6 points in April, registering a net negative 26 percent, still an ugly number but sales trends improved and fewer owners cut selling prices, both positive for the bottom line. Seasonally adjusted, a net 9 percent reported raising worker compensation, up 2 points. A seasonally adjusted 7 percent plan to raise compensation, down 2 points.

Overall, 92 percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied. Three percent reported financing as their #1 business problem, so “credit supply” is not a problem for the overwhelming majority. For the banks with money to lend, “credit demand” is weak. The historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new workers are not likely to “pay back”. This is a major cause for the lack of credit demand observed in financial markets along with the deficiency in housing starts, a million units below “normal”. Thirty-two percent of all owners reported borrowing on a regular basis, 4 points above the record low.


The “get up and go” usually present in the small business sector after a recession “got up and went” somewhere. For the small business sector, this is the worst recovery on record. The recovery in the small business indicators looks especially anemic in comparison to the recovery after the 1980-82 recession period, the era with a depth most comparable to our most recent experience. The explanation for this is murky and complex, driven by the “seeds of destruction” planted in the 2003-07 expansion. When stock market bubbles burst, winners and losers are quickly identified and the economy moves on as the redistribution in wealth is efficiently imposed by the market. This time around, the process of declaring winners and losers is impeded by the complications of mortgage finance concocted by the financial market and the efforts of the government to prevent the redistribution required. Houses are more widely held than stocks and the crash has impacted many more people and reached far down the income distribution, impacting attitudes as well as the ability to spend. Savers’ incomes have been impaired by the Fed’s low rate policies. The over-supply of houses, business facilities and inventory weigh heavily on new construction and until recently, production. Although much lower, the ratio of consumer debt to income is still high, families not actually in foreclosure are still saddled with high mortgage payments. And then there’s Washington. Enough said, not enough room to detail the detrimental impact of the uncertainty created by “leadership” there. Unemployment remains high because in the boom, employment was too high and especially in construction where excessive levels of employees created such high output that it impeded their re-employment in the recovery. The much vaunted “risk managers” at financial institutions failed, and their institutions would have as well had they not been “bailed out”. Owners report that inventories are now in balance with expected sales, but these expectations are muted, providing little reason to hire more workers. Capital spending remains low because the prospects of generating the additional sales needed to pay off loans used to finance expansion are not good. Selling prices are rising sharply not because costs are rising but because the “fire sale” needed to bring inventories and excess retail capacity into balance is about over. New construction and services are labor intensive and dominated by small firms. Spending must recover here to get employment up and running. Maybe after consumers are through buying cars they will get their nails done.

This survey was conducted in April 2011. A sample of 10,799 small-business owners/members was drawn. One thousand nine hundred ten (1985) usable responses were received - a response rate of 18 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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