Small Business Economic Trends - April 2010

Optimism Index
The Index of Small Business Optimism lost 1.2 points, falling to 86.8. The persistence of Index readings below 90 is unprecedented in survey history. The Index has posted 18 consecutive monthly readings below 90. The March Index continues this trend, and heading in the wrong direction, very inconsistent with the notion that the economy is recovering and that job growth has strength. Nine of the 10 Index components fell or were unchanged from February's. Not the picture of an economic expansion.

Labor Markets
After a devastating period of employment reductions, employment change per firm hit the "zero line" in March, setting the stage for a resumption in job creation. Nine percent (seasonally adjusted) reported unfilled job openings, down two points, a "negative" for hope that the unemployment rate will fall. Over the next three months, seven percent plan to reduce employment (down one point), and 15 percent plan to create new jobs (up two points), yielding a seasonally adjusted net negative two percent of owners planning to create new jobs, weaker than February and still more firms planning to cut jobs than planning to add.

Capital Spending
The frequency of reported capital outlays over the past six months fell two points to 45 percent of all firms, one point above the 35 year record low. Plans to make capital expenditures over the next few months fell one point to 19 percent, three points above the 35 year record low. Two percent characterized the current period as a good time to expand facilities, down two point from February. A net negative eight percent expect business conditions to improve over the next six months, up one point from February, but nine points below January and a very pessimistic reading. With all the good news about the economy and Gross Domestic Product (GDP) growth, it is not clear why owners remain so pessimistic and unwilling to commit to new spending.

Inventories and Sales
The net percent  of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved one point to a net negative 25 percent. The net percent of owners expecting real sales gains lost three point, falling to a net negative three percent of all owners, seasonally adjusted, this after a three point decline from January to February. Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. A net negative 18 perent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), 10 points better than December's record liquidation reading but unchanged from February.

Inflation
The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative 20 percent, one point better than last month. Plans to raise prices fell one point to a net seasonally adjusted nine percent of owners. On the cost side, five percent of owners cited inflation as their number one problem (e.g. costs coming in the "back door" of the business) and only three percent cited the cost of labor, so neither labor costs nor materials costs are pressuring owners.

Profits and Wages
Reports of positive profit trends worsened by four points in March, registering a net negative 43 percentage points (39 points worse than the best expansion reading reached in 2005). The persistence of this imbalance is bad news for the small business community. Profits are important for the support of capital spending. For those reporting earnings compared to the previous three months (58 percent, up three points), 62 percent cited weaker sales, two percent blamed rising labor costs, five percent higher materials costs, three percent higher insurance costs, and seven percent blamed lower selling prices. Five percent blamed taxes and regulatory costs. Owners continued to reduce compensation at historically high rates, with 10 pecent reporting reduced worker compensation and 10 percent reporting gains. Seasonally adjusted, a net zero percent reported raising worker compensation, only two points better than February's record low reading of negative two percent.

Credit Markets
Regular NFIB borrowers (35 percent accessing capital markets at least once a quarter) continued to report difficulties in arranging credit. A net 15 percent reported loans harded to get than in their last attempt, up three points from February. Eighty-nine (89) percent of the owners reported all their credit neesdmet or they did not want to borrow. Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many good borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory and take out the usual loans used to support these activities. Only five percent of the owners reported "finance" as their top business problem (up two points). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. What businesses need is sales, giving them a reason to hire and make capital expenditures and borrow to support those activities.

COMMENTARY

While news about the economy has been positive for two or three quarters, small business owners remain quite pessimistic about the future for the economy. The Optimism Index has been below 90 for 18 consecutive months and below 90 in all but four months since the recession started in January of 2008. At the bottom of the 1982 recession, a net 47 percent of the owners expected improved business conditions in the coming months; in March, the net percent expecting improvement was negative eight percent, 55 percentage points worse than at the same cyclical point in the recession/recovery.

Since small firms produce half the private sector GDP, it is hard to envision a sustained recovery without their participation. Once the gains from inventory rebuilding are exhausted, it is hard to see what will fuel growth. Smal firm capital spending is at 35 year low levels and plans for future expenditures are equally low. Plus, hiring plans remain "negative" as more firms still plan reductions than increases in their employment. In an NFIB sponsored survey of small Dunn & Bradstreet firms, 51 percent said weak sales was their top concern, but in second place with 22 percent of the "votes" was "uncertainty about the economy." The uncertainty seems to emanate from the political side, in Washington D.C. and the states.

The administration is clearly favoring unions, from Executive Orders to special deals in the healthcare to the bailout of GM and Chrysler to card check - and the list goes on. This is not good news for small firms that see labor costs rising while flexibility managing the workforce is declining. Significant new taxes are imposed by health care legislation which will eventually cover all firms (smaller firms are now expempt from compliance of many aspects but the government need for more tax revenue will result in an elimination of those in future years). The so-called "tax credits" to help small firms offset some of the health care insurance costs evaporate after 2 yeras and compliance is complex (typical of government programs).

Capital spending and inventory investment plans remained historically low as did plans to create new jobs. Profits trends are terrible, undermining owner's ability to finance any aspect of growth. The private sector is struggling to get back on its feet, but is receiving little encouragement from Washington, which is preoccupied with health care and higher taxes to finance unimaginable deficits. Uncertainty does inded remain high, fueled mostly by the actions of political leaders in Washington D.C. and the states. The core of the problem - a refusal to control the growth and reach of government and to pile up huge fiscal problems that politicians will use to justify higher taxes and new entitlements and rights to be paid for by a diminished private sector.

This survey was conducted in March 2010. A sample of 3,938 small-business owners/members was drawn. Nine hundred and forty-eight (948) usable responses were received - a response rate of 24 percent. 

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