Small Business Economic Trends - July 2009
SUMMARY
Optimism Index
The Index of Small Business Optimism lost one point, falling to 87.9 (1986=100) after posting a gain of 6.9 points since March. Four of the ten Index components posted gains, six lost ground. The decline, although small in magnitude, was primarily a result of declines in expected real sales and expected business conditions.
Labor Markets
Eleven (11) percent (seasonally adjusted) reported unfilled job openings, up two points from May. A seasonally adjusted net negative one percent of owners plan to create new jobs, a four point improvement, but still not "positive." Over the next three months, 10 percent plan to reduce employment (down one point), and 10 percent plan to create new jobs (down two points). Reports of compensation custs and increases remained in record territory, with 12 percent reporting reduced worker compensation and 11 percent reporting higher worker compensation, helping to keep the lid on labor costs. Seasonally adjusted, a net three percent reported raising worker compensation, a 35 year record low reading. The 12th month inflation rate remained negative, so for workers whose nominal wages and benefits were not cut, real incomes still rose.
Capital Spending
The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, well below last year's reading. Plans to make capital expenditures over the next few months fell three points to 17 percent, historically very low. Four percent characterized the current period as a good time to expand facilities, down one point from May. A net seven percent expect business conditions to improve over the next six months, down five points from May but 15 points better than March, a significant improvement in expectations overall.
Inventories and Sales
Small business owners continued to liquidate inventories. A net negative 27 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), unchanged from April and May, which posted record lows. Inventories have been reduced at a record pace, continuing 25 months of negative readings in a row. It is hard to believe there is anything left on the shelves. For all firms, a net negative five percent (a three point deterioration) reported stocks too low. In sales, expectations for gains in real sales lost ground, shedding five points from the May reading, falling to a net negative 10 percent expecting improvements, still negative but 21 points better than the March record low level. The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months gave a point, falling to a net negative 34 percent, equal to the record low set in March.
Inflation
In June, 13 percent of small business owners reported raising their average selling prices (up one point) over the last three months, while 31 percent reported reductions in average selling prices (down two points). There is no sign of inflation in these numbers. Seasonally adjusted, the net percent of owners raising prices was net negative 17 percent, far more cutting prices than raising them, but five points more positive than May. Plans to raise prices rose two points to a net seasonally adjusted five percent of owners, 33 points below the July 2008 reading. A five point rise in the precent of owners planning to raise selling prices from the March low of zero percent is a good sign. But pricing power (and profits) will not recover soon since "excess capacity" and "surplus labor" abound. On the cost or input side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the "back door" of the business) rose two points to five percent.
Profits and Wages
Reports of positive profit trends were unchanged at a net negative 42 percentage points, not a significant gain, still at record low levels. Not seasonally adjusted, 14 percent reported profits higher (up three points), but 55 percent reported profits falling (down three points). Reports of sales declines are at record high levels because of reduced demand. Seasonally adjusted, a net five percent reported raising compensation, down two points, a record low. For those reporting lower earnings compared to the previous three months (55 percent, down three points), 62 percent cited weaker sales, four percent blamed rising labor costs, three percent blamed higher materal costs, four percent blamed high insurance costs, and seven percent blamed lower selling prices. Two percent blamed higher financing costs and sixe percent blamed regulatory costs. Weak sales and price cuts are responsible for much of the weakness in profits.
Credit Markets
Thirty (30) percent reported regular borrowing, an historically low figure, but only a few points below the 20 year average. Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending. Thirty (30) percent reported all their borrowing needs met (up two points) compared to 10 percent who reported problems obtaining desired financing (up one point; not seasonally adjusted). The net percent of owners reporting loans harder to get fell two points to 14 percent of all firms. As the recession drags on, financing becomes more difficult to arrange (profits do not improve, loan payments harder to make on time, etc.). But only six percent of the owners reported "finance" as their #1 business problem, up one point from May, double recent readings, but still a very low number.
COMMENTARY
The economy is bouncing along the bottom and reorganizing itself to restart the growth process. Many indicators, including NFIB's, are now headed up. They are still in "negative" territory, but will soon break the surface and become positive. The labor market indicators seem to be a finding foothold, even if a bit slippery. Based on the June numbers, the unemployment rate is expected to head down to 8.8 percent over the next three months, consistent with a return to growth in the third quarter (as predicted last year).
In credit markets, the June date indicate taht borrowing conditions might be easing a bit, but as the recession lingers, more are running into cash flow problems and report financing as their top business problem (6 percent, up from 3 percent earlier in the year, but very low compared to over 35 percent for most of 1982). The NFIB date contradict all the media claims that small businesses cannot get credit. It is more difficult than in 2003 when the expansion began, but there was no significant difference in the patterns of the credit statistics in this expansion than in the past expansions, and definitely no "freezing up" of credit availability as advertised in the media. The real challenge to credit availability will come in the next two years as we try to finance trillions of dollars of federal and state deficits.
The inflation threat is an empty one near-term. There is plenty of excess capacity and labor to support a lot of growth before price pressures surface. However, the longer the recession goes on, the larger the amount of "capacity" that gets shut down in one form or another, raising concerns about pressures a year from now when the economy is growing. The Consumer Price Index inflation has been negative over the past 12 months, but that is a result solely of energy price declines. Other prices have been increasing. Still, many more firms are cutting prices than raising them and that means average prices are falling on "main street." Longer term, the concern revolves around the huge amount of gasoline the Federal Reserve has poured out to encourage a little fire - too many matches may be lit before the Federal Resreve can mop it up.
This survey was conducted in June 2009. A sample of 3938 small-business owners/members was drawn. Seven hundred fifty-eight (758) usable responses were received - a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2009, NFIB retains ownership. All Rights Reserved.
