Small Business Economic Trends - January 2011

Bill Dunkelberg


Optimism Index
The Index of Small Business Optimism lost 0.6 points in December, not a huge change but not the hope-for rebound that would signify more growth in the small business sector. Apparently, the “management change” in Washington and marginally better retail sales numbers were not enough to pump up spirits at the New Year celebrations. This marks the 36th month of recessionary levels. Only once in that period did the Index get above 93 (last month) and has been below 90 for 26 months.

Labor Markets
Thirteen (13) percent (seasonally adjusted) reported unfilled job openings, a four point improvement that anticipates a reduction in the unemployment rate in the coming months. Over the next three months, 10 percent plan to increase employment (up one point), and nine percent plan to reduce it (down three points), yielding a seasonally adjusted net six percent of owners planning to create new jobs, a two point gain from December and the best reading in 27 months. Until sales picks up, there is no pressing reason to hire. The reduction in the payroll tax will add some impetus to hiring as most of that addition to take home pay will likely be spent.

Capital Spending
The frequency of reported capital outlays over the past six months fell four points to 47 percent of all firms, disappointing and only three points over the record low level. Eight percent characterized the current period as a good time to expand facilities (seasonally adjusted), down one point but six points better than earlier in the year and the third highest reading since the economy peaked in December 2007. A net nine percent expect business conditions to improve over the next six months, down seven points from November’s rather astonishing reading (the level of optimism we had been hoping for) but historically decent. It is the second best reading since the 4th quarter of 2009 when the economy was expanding rapidly. Apparently the future is looking brighter for more owners, although much will depend on what Congress does early in 2011. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months worsened by one point to a net negative 16 percent, 18 points better than March 2009 but still indicative of weak customer activity.

Inventories and Sales
The net percent of owners expecting higher real sales continued to rise, gaining two points to a net eight percent of all owners (seasonally adjusted), an 11 point gain since September. Plans to add to inventories fell three points to a net negative three percent of all firms, consistent with mild dissatisfaction with current stocks and weak sales trends, but not consistent with the improved outlook for real sales volumes, a confusing picture.

The downward pressure on prices appears to be easing as more firms are raising prices and fewer cutting them. Fourteen (14) percent of owners (unchanged) reported raising average selling prices, and 20 percent reported average price reductions (unchanged). Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, only a point different from November. Still, December is the 25th consecutive month in which more owners reported cutting average selling prices than raising them. However, the trend is clearly supportive of higher prices in future months. Widespread price cutting does contribute to the high percentage of firms reporting declining sales revenues, so this source of disappointing nominal sales trends will soon vanish. Plans to raise prices rose two points to a net seasonally adjusted 15 percent of owners, the highest reading in 26 months. With an improving economy, more and more of these hikes will “stick”. Overall, this is not a “deflationary” outlook, but price increases will remain moderate for some time.

Profits and Wages
Reports of positive earnings trends fell four points in December, registering a net negative 34 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. Not seasonally adjusted, 14 percent reported profits higher (down one points), but 47 percent reported profits falling, a four point increase. For those reporting lower earnings compared to the previous three months, 55 percent cited weaker sales, four percent blamed rising labor costs, six percent higher materials costs, two percent higher insurance costs, two percent higher financing costs, and four percent blamed lower selling prices. Six percent blamed higher taxes and regulatory costs. Large firms may be posting great profits, but the trend on Main Street is not supportive of solid hiring and capital spending. Labor cost, materials costs, interest rates – not the problem. It is still weak sales. Seven percent reported reduced worker compensation and 11 percent reported gains. Seasonally adjusted, a net eight percent reported raising worker compensation, unchanged from November. Labor costs are not a problem for inflation yet but are not fading any longer.

Credit Markets
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 50 percent said they did not want a loan, down three points. Thirty (30) percent of all owners reported borrowing on a regular basis, up two points from the record low. A net 12 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up one point from November. Reported and planned capital spending are still hovering around survey record low levels, but are showing reluctant improvement.


It appears that the small business sector remains in a “rut”, unable to find reasons (drained by a 2 plus year recession period) to ramp up hiring and capital spending. The top problem remains weak sales, spread over too many firms. With weak sales prospects, hiring or spending on capital projects have little likelihood of paying off and therefore will not happen. Congress passed or tried to pass a ton of legislation that had little to do with helping the economy. It is no wonder that consumers and owners are in a canyon of pessimism, the recession took a huge economic toll and the leadership inspired fear, not confidence. With the small business sector on the sidelines, it is hard to get national growth above the 2 to 3 percent range and the economy will not enjoy the type of rebound experienced after 1982 when GDP grew eight percent for over a year.

With the threat of higher labor costs from the health care regulations (being written, so still not understood) and others labor directed regulations, policy is still a job creation depressant. A worker must be able to at least earn their pay if they are to be employed. Adding new labor regulations such as those in healthcare make this hurdle even harder to overcome.

OK, so getting out of the recession “rut” won’t be easy. Government is not on the side of the “angels” so investment and job creation will continue to face headwinds. But, the private sector is strong and will bear the cost of larger more intrusive government. We can certainly “hope for change” here, but history warns against a lot of optimism. Unfortunately, it will keep us from reaching our potential. There were signs of improvement last month and therefore it looks like we will get a bit more job creation and capital spending in the first quarter, sales will be better, profits will improve. There will be more inflation, something the Federal Reserve is wishing for. But, a “gangbusters” year (like 1983 or 1984) is not in the cards.

This survey was conducted in December 2010. A sample of 3,938 small-business owners/members was drawn. Eight hundred and four (804) usable responses were recieved - a response rate of 20 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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