Small Business Economic Trends - December 2008
SUMMARY
Optimism Index
Small business owners broadly and sharply feel the impact of the recession. While the National Federation of Independent Business Index of Small Business Optimism rose a marginal 0.3 points to 87.8 (1986=100), it was the fourth lowest reading in the 35-year history of the survey.
Labor Markets
The decline in average employment per firm of 0.08 (seasonally adjusted) was not nearly as bad as September and October. Nine percent increased employment by an average of 6.5 workers per firm; 19 percent reduced employment an average of 3.4 workers per firm (seasonally adjusted). Forty-three (43) percent of those surveyed hired or tried to hire (down 3 points), and 72 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. Eight percent of the owners said the availability of qualified labor was their top business problem, down from 17 percent in September 2007. Over the next three months, 6 percent plan to create new jobs (down 3 points), and 17 percent plan workforce reductions (up 2 points), yielding a seasonally adjusted net-negative 4 percent of owners planning to create new jobs, one of the lowest readings in survey history. Lower readings occurred only in the 1974-75 and the 1980-82 recession periods.
Capital Spending
The frequency of reported capital outlays over the past six months rose 2 points to 56 percent of all firms, still at recession levels. Thirty-eight (38) percent reported spending on new equipment (up 2 points), 19 percent acquired vehicles (down 1 point), 14 percent spent money for new fixtures and furniture (up 2 points), and 13 percent improved or expanded their facilities (unchanged). Five percent acquired new buildings or land for expansion (unchanged). Overall, spending is weak, but the frequency of outlays has improved for the last two months. There was a slight increase in the number of owners planning to make capital expenditures over the next few months: up 2 points. Seven precent characterized the current period as a good time to expand facilities, up 2 points, but very low.
Inventories and Sales
Small business owners continued to liquidate inventories. A net-negative 17 percent of owners reported gains in inventory stocks, the eighth negative, double-digit month in a row. Unadjusted, 10 percent reported gains, and 27 percent reported inventory reductions. A net-negative 4 percent of all firms (unchanged) reported stocks too low (seasonally adjusted). The net percent of all owners reporting higher sales in the past three months (seasonally adjusted) lost 4 points, falling to a net-negative 25 percent, the worst reading in the 35-year survey history.
Inflation
Price pressures vanished in November. The net percent of owners reporting higher average selling prices dropped 15 points to a net zero percent in November (seasonally adjusted, down 32 points since July). Unadjusted, 21 percent reported raising average selling prices, down 8 points, and 23 percent reported lower selling prices, up 6 points from October. The percent of owners citing inflation as their No. 1 problem fell 2 points to 9 percent. The number of those planning to raise prices fell 7 point to a net, seasonally-adjusted 11 percent of owners, 27 points below the July reading, and good news for the Federal Reserve.
Profits and Wages
Profit gains deteriorated another 3 points to a negative 38 percentage points. Not seasonally adjustsed, 14 percent reported profits higher, but 50 percent reported profits falling. Of the owners reporting higher earnings (14 percent, unchanged), 64 percent (up 14 points) cited stronger sales as the cause, and 11 percent each credited lower materials costs and higher selling prices. For those reporting lower earnings compared to the previous three months (50 percent, up 2 points), 54 percent cited weaker sales (up 4 points), 24 percent cited higher materaials costs (including energy) and 8 percent blamed lower selling prices. The net percent of owners reporting earnings gains deteriorated further in November. Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 38 percentage points, the second worst showing in 35 years of survey history.
Credit Markets
As the economy weaknes, loan demand continues to decline. Only 31 percent reported regular borrowing, down 2 points and equal to the 35-year, record-low reading. Plans to add to inventories and plans for capital outlays have declined to historically low levels since September of 2007. The credit worthiness of potential borrowers has also deteriorated over the last year, leading to more difficult terms and higher loan rejection rates, even with no change in lending standards. Thirty-one (31) percent reported all their borrowing needs met compared to 7 percent who reported problems obtaining desired financing. The net percent of owners reporting loans harder to get rose 2 points to 11 percent of all firms, revisiting the expansion high reached in September. No credit crunch has appeared to date beyond the normal cyclical tightening of credit.
COMMENTARY
The National Bureau of Economic Research, the official "historians" of the business cycle, announced that the economy peaked in December, 2007. Since then, the economy has slogged its way downhill. Economic growth was solid in the middle of 2007, 4.8 percent in the second and third quarters of 2007, but plunged to -0.2 percent in the fourth. Then the pace of activity picked up in the first quarter, posting growth of 0.9 percent followed by 2.8 percent in the second, then -0.5 percent in the third quarter this year. No "rule of thumb" recession (two quarters of negative growth back to back) yet, but even this recession measure will be satisfied at the end of the fourth quarter.
"Monetary policy" is providing immense amounts of liquidity (if I buy yoru car, your net worth is unchanged on your balance sheet, but you have lots of cash which yields no return - what will "you" do with it? Lend? Spend? And maybe I will overpay you for your car!). Lower oil prices are delivering a $400 billion "stimulus package" (assuming $50 oil for a year), much needed, although not an "energy policy" that will encourage the development of alternatives to oil based energy generation. In real terms (like how long a worker must labor to buy 10 gallons of gas), gas is cheap!
The net percent of owners planning to create news jobs is a negtive 4 percent, rivaling readings in the 1974-75 and 1980-82 periods. The percent with unfilled openings is the lowest since 1992 (but still better than in 1990-91 and 1980-82 periods). Reports of declining sales are the largest in survey history. Planned capital expenditures remain among the lowest readings in 35 years, although improved in November. Pricing power has vanished, good news for policy makers, but reports of profit declines are at record levels, not good for hiring and spending prospects. With housing starts about half of what would normally be needed to satisfy household formation demand, the stock of surplus units should be cleaned up in most parts of the U.S. by the end of the first quarter of 2009 (except in places like Florida and Southern California where new constuction was immensely overdone). This will help revive the construction industry which is dominated by small builders and help stabilize house prices.
The economy is trying to sort out the winners from the losers, government policy is, in simple terms, interfering by providing "humanitarian relief" to struggling firms (and consumers) to blunt the impact of the adjustment on its citizens. This is typically the way the story plays out and there will be long term implications as always. At the end of this chapter of our economic history, the reach of government into the private sector will be large indeed and how well the economy does going forward will depend in part on how this is managed.
This survey was conducted in November 2008. A sample of 3938 small-business owners/members was drawn. Eight hundred twenty-six (826) usable responses were received - a response rate of 21 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2008, NFIB retains ownership. All Rights Reserved.
