Small Business Economic Trends - December 2010
SUMMARY
Optimism Index Credit Markets Overall, small business owners continued to report more improvements in the economic environment, but the gains were small. The Index of Small Business Optimism gained 1.5 points, but the reading of 93.2 is still very weak, closer to a recession reading than indicative of a recovery. Although the November reading is higher than the prior 34 months, it is still lower It was encouraging to see substantial improvement in expectations for economic performance (sales, business conditions), critical if spending and hiring are to elevate beyond survival and replacement levels. And plans to hire, make capital outlays and invest in inventories all rose, albeit from historically low levels. It’s a start and now the odds that Congress will do The current policy debates illustrate just why owners and consumers are confused and frustrated. The 1099 reporting requirement has been widely characterized in Congress as a mistake, bills have been introduced, but not passed. Why? Politics. Politicians continue to say we must raise taxes to This survey was conducted in November 2010. A sample of 3,938 small-business owners/members was drawn. Eight hundred and seven (807) usable responses were recieved - a response rate of 21 percent. Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
The Index of Small Business Optimism gained 1.5 points in November after a 2.7 point gain in October, rising to 93.2. Still, the Index remains in recession territory. Consumer optimism measures grudgingly gave up modest improvements as did the Index, but nowhere is there evidence of a “surge” as experienced in 1983 after the deep recessions of 1980-82.
Labor Markets
Nine percent (seasonally adjusted) reported unfilled job openings, down one point and historically very weak. This Index component is a very good predictor of the unemployment rate – and this number indicated the rate will nudge higher. Over the next three months, nine percent plan to increase employment (up one point), and 12 percent plan to reduce their workforce (down one point), yielding a seasonally adjusted net four percent of owners planning to create new jobs, a three point gain from October.
Capital Spending
The frequency of reported capital outlays over the past six months rose four points to 51 percent of all firms, pulling away from the recent record low reading of 44 percent. The percent of owners planning capital outlays in the future rose two points to 20 percent, but is still historically quite low. Money is cheap, most owners however are not interested in a loan. Prospects are still uncertain enough to discourage any but the most profitable investments. Spending seems to be primarily in “maintenance mode” – if it breaks, replace it, but that’s it.
Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months worsened by two points to a net negative 15 percent. Although 19 points better than March 2009, it is still indicative of very weak customer activity. Widespread price cutting contributed less to reports of lower nominal sales as fewer firms reported cuts in average selling prices. Overall, it does not appear that sales trends are yet supportive of a widespread recovery in the small business sector
even if a bit stronger than October. The net percent of owners expecting higher real sales gained five points from October, rising to a net six percent of all owners (seasonally adjusted), a nice bump on top of October’s four point gain. In June 2007, more firms began reducing inventory stocks than adding to them. For all firms, a net negative three percent (down four points) reported stocks too low, an unexpected deterioration in owner satisfaction with current stocks (compared to expectations for sales and the economy that have actually improved). Plans to add to inventories rose four points to a net 0 percent of all firms (seasonally adjusted), a surprise with the increased dissatisfaction with current stocks.
Inflation
The downward pressure on prices appears to be easing as more firms are raising prices and fewer cutting them. Seasonally adjusted, the net percent of owners raising prices was a net negative four percent, a one point increase from October. Still, November is the 24th consecutive month in which more owners reported cutting average selling prices that raising them, a condition that might support concerns about “deflation” now
worrying the Federal Reserve. Should the planned hikes “stick”, the Federal Reserve could reduce its concern about deflation. Only four percent of owners cited inflation as their number one problem on the input side and only three percent cited the cost of labor, so neither labor costs or materials costs are pressuring owners to raise prices.
Profits and Wages
Reports of positive earnings trends fell four points in November,
registering a net negative 30 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising. Part of this is due to price cutting, which is fading in frequency as the economy continues to grow. Of those reporting lower earnings compared to the previous three months, 56 percent cited weaker sales, five percent blamed rising labor
costs, seven percent higher materials costs, five percent higher insurance costs and nine percent blamed lower selling prices. Seven percent blamed higher taxes and regulatory costs. Reports of higher worker compensation continued to edge up while reports of compensation cuts continued to fade. Seasonally adjusted, a net eight percent reported raising worker compensation, double October’s reading and 10 points better than February’s record low reading of negative two percent.
Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported that not all of their credit needs were satisfied, and a record 53 percent said they did not want a loan (13 percent did not answer the question and might be presumed to be uninterested in borrowing as well). Only four percent reported financing as their #1 business problem. However, 30 percent of
the owners reported that weak sales continued to be their top business problem, followed by 22 percent citing taxes and 15 percent government regulations and red tape (taxes that consumes capital and time). A record low 28 percent of all owners reported borrowing on a regular basis. Reported and planned capital spending are still hovering around 37 year record low levels, but are showing reluctant improvement. Housing starts
are a million units below “normal”, more credit demand (and jobs) on the sidelines. The percent of owners reporting higher interest rates on their most recent loan was four percent, while five percent reported lower rates. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10 percent (more owners expect that it will be “harder” to arrange financing), a two point improvement. Rates are low, but most owners are not interested in borrowing.
COMMENTARY
than the November - December, 2007 readings by over a point, and those were the lowest 2007 readings as the Index fell all year signaling the coming end to the expansion in December. So the Index has climbed from its recession low of 81 but is far short of even the average value of the Index prior to the start of the recession, and far below values that have typified a recovery period.
something to dampen expectations has been greatly reduced by the election.
support what government is doing but not asking if what government is doing is appropriate or helpful. The tax rates currently in place have been there for 10 years, but continuing these is labeled as giving billions to rich people and we are told how much larger the deficit will be if we don’t have the rich pay more in taxes. Democrats have been able to raise taxes on the rich for two years now with their super majorities, why didn’t they
act if that was the way to lower the deficit? Because it would likely not have passed. Raising taxes, especially in a recession, is just bad policy. The political posturing is creating a mess in trying to develop good tax policies. But it needn’t be if everyone wasn’t in constant campaign mode. Amazing how this prevents us from doing sensible things.
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