Small Business Economic Trends - April 2011
Summary
Optimism Index
The Index of Small Business Optimism gave up 2.6 points in March, falling to 91.9. Four components rose or were unchanged, while six lost ground. The “hard” components of the Index (job creation, job openings, capital spending plans and inventory plans) added two points while the “soft” components (the other six in the table above) gave up 31 points. Index was driven by weaker expectations for real sales gains and business conditions and a marked deterioration in profit trends. The decline in the percent of owners expecting higher real sales and better business conditions in six months alone account for 76 percent of the decline in the Index.
Labor Markets
Fifteen (15) percent, seasonally adjusted, reported unfilled job openings, unchanged from February. Over the next three months, 18 percent plan to increase employment (up 1 point), and 6 percent plan to reduce their workforce (unchanged), yielding a seasonally adjusted net 2 percent of owners planning to create new jobs, down 3 points from February, not great but still positive. This is historically low, especially for a recovery period. While these few new jobs are nudging the unemployment rate down, they do not make much of a dent in the pool of unemployed.
Capital Spending
The frequency of reported capital outlays over the past six months rose 2 points to 51 percent of all firms. But despite the improvement, this is still a “recession level”. 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 cannot use it. The percent of owners planning capital outlays in the future rose 2 points to 24 percent, an improvement but still historically quite low. Money is cheap, but most owners are not interested in a loan to finance equipment they do not need. Prospects are still uncertain enough to discourage any but the most profitable and promising investments.
Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months worsened by 1 point to a net negative 12 percent, 22 points better than the recession low reading in March 2009 (near the recession bottom), but still indicative of weak customer activity. The net percent of owners expecting higher real sales fell eight points to a net 6 percent of all owners (seasonally adjusted). This is bad news for hiring and inventory investment. Small business owners continued to liquidate inventories but at the lowest frequency in 35 months. A net negative 7 percent of all owners reported growth in inventories (seasonally adjusted), a 1 point improvement.
Inflation
In March, a net 9 percent reported raising average selling prices, a gain of 33 percentage points from the low reading in 2009 and 20 points more than last September! Inflation is back on Main Street. In March, 24 percent planned hikes in average selling prices with many by 10 percent or more. A major force behind the price hikes is the elimination of inventory excesses which appeared in 2008 when consumers decided to raise their saving rate from 1 percent to about 6 percent, a reduction in consumption spending of about half a trillion dollars. The “fire sale” is over and profits are badly in need of some price support. Note that these hikes started before higher gas and energy prices became a real issue except for transportation firms and those with delivery services. Plans to raise prices rose 3 points to a net seasonally adjusted 24 percent of owners, the highest reading in 30 months. With an improving economy, more and more of these hikes will “stick”.
Profits and Wages
Reports of positive earnings trends deteriorated in March, registering a net negative 32 percent, 5 points worse than February. Seventeen (17) percent of the owners reported cutting prices, contributing to weaker earnings. Price cutting is evaporating. Large firms may be posting great profits, but the trend on Main Street is not supportive of solid hiring and capital spending. Costs for energy, materials and labor, and higher interest rates are not the problem; these are yet to come. It is still weak sales. Seasonally adjusted, a net 7 percent reported raising worker compensation, down 1 point. But reported gains in the first quarter are the strongest since the fourth quarter of 2008. A seasonally adjusted 9 percent plan to raise compensation, up 2 points and the highest reading since November 2008.
Credit Markets
Overall, 93 percent reported that all their credit needs were met or that they were not interested in borrowing. Seven percent reported that not all of their credit needs were satisfied, and 53 percent said they did not want a loan. Four percent reported financing as their #1 business problem. Twenty-five (25) percent of the owners reported that weak sales continued to be their top business problem (down 3 points), followed by 17 percent citing taxes and 17 percent government regulations and red tape. 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 of the lack of credit demand observed in financial markets along with the deficiency in housing starts, a million units below “normal”. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, 1 point above the record low. A net 8 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), down 3 points. Credit availability is not holding back loan growth, it is a lack of demand.
Commentary
Optimism faded, and is still at recession levels. Maybe it is a “new normal”. Maybe we will not see the surges we experienced at the start of a recovery. Times are different, government is a larger drag all the time. It wants more taxes and imposes more restrictions. New York has a new bureaucracy to help new restaurant owners get through the bureaucracy. How insane! Uncertainty is still huge and it clouds the future. Leadership does not do things that make sense to those who create jobs and wealth, only to those who take it. Inflation is coming back, a little too soon with so much slack in the economy. Although the rhetoric in Washington continues to suggest that a major reason for the slow recovery has been that banks will not lend to credit- worthy borrowers, the evidence from the NFIB survey of hundreds of thousands of small firms suggests that this is not the case. The economy generated a lot of jobs by making bad loans (the housing bubble mess), and they are gone now. We could generate more jobs by making more bad loans, but the price paid will be even larger than this past recession. All through the “credit crisis”, the percent of small business owners complaining about financing problems stayed near 35 year low levels. Community banks across the country report that they have money to lend, but the pipeline of good applicants collapsed in the recession as the NFIB data show. Only a few firms complain that all their credit needs were not met. More than half do not even want a loan. The decline in house prices has indeed reduced the amount of home equity available to owners, but not below pre-2007 levels. As we learned, pre-recession real estate equity was not real, just as the equity in the dot.com bubble was not real and certainly could not be used as real “collateral”. The Federal Reserve has but one real policy tool – interest rates. But rates are not the only variable in the hiring and investment (real, not financial) equations. Relying on interest rate adjustments is akin to pushing on a string. The SBA and the Treasury can keep creating lending facilities of various types but that is not the problem and so far they have had little impact. Community banks are happy to engage in real banking and will make loans once businesses find a good reason to borrow. On the job side, it is going to take a rebound in consumer spending, particularly in the service sector to make a significant dent in the number of unemployed. The manufacturing sector is doing very well, but it does not create many jobs. Consumers continue to “de-leverage” so spending will recover slowly as they regain their financial footing. Unfortunately, the increase in energy costs will not help. Progress will be slow.
This survey was conducted in March 2011. A sample of 3,938 small-business owners/members was drawn. Eight hundred eleven (811) usable responses were received - a response rate of 21 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2011, the NFIB retains ownership. All Rights Reserved.
