Small Business Economic Trends - July 2010

Optimism Index
The Index of Small Business Optimism lost 3.2 points in June after posting modest gains for several months. The persistance of Index readings below 90 is unprecedented in survey history. The performance of the economy is mediocre at best, given the extent of the decline over the past two years. The small business sector is not on a positive trajectory and with this half of the private sector "missing in action," the poor growth performance is no surprise.

Labor Markets
Nine percent (seasonally adjusted) reported unfilled job openings, unchanged from May and historically very weak. Over the next three months, eight percent plan to reduce employment (up one point), and 10 percent plan to create new jobs (down four points), yielding a seasonally adjusted net one percent of owners planning to create new jobs, unchanged from the May reading and positive for the second time in 20 months. Since the third quarter of 2009, job creation plans have underperformed the recoveries from the other two deep recessions covered by the NFIB survey.

Capital Spending
The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, two points above the 35 year record low reached most recently in December 2009. The percent of owners planning to make capital expenditures over the next few months fell a point to 19 percent, three points above the 35 year record low. Six percent characterized the current period as a good time to expand facilities, up one point. But a net negative six percent expect business conditions to improve over the next six months, down 14 points from May. Owners do not trust the economic policies in place or porposed and are distressed by global and national developments that make the future more uncertain.

Inventories and Sales
The net percent  of all owners (seasonally adjusted) reporting higher nominal sales in the past three months lost four points, falling to a net negative 15 percent, 19 points better than June 2009, but still far more firms reporting negative sales trends quarter to quarter than positive. The net percent of owners expecting real sales gains lost 10 points, falling to a net negative five percent of all owners (seasonally adjusted). Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. A net negative 21 percent of all owners reported gains in inventories (seasonally adjusted), one point worse than May. Inventories had been built in the expansion to satisfy the spending of a consumer that was saving virtually nothing. Plans to add to inventories declined five points to a net negative three percent of all firms (seasonally adjusted).

Inflation
The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negatiev 13 percent, a two point increase in the net percent raising prices. June is the 19th consecutive month in which more owners reported cutting average selling prices than raising them. Widespread price cutting contributes to the high percentage reporting declining sales revenues. Plans to raise prices fell three points to a net seasonally adjusted 11 percent of owners.

Profits and Wages
Reports of positive profit trends worsened by three points in June, registering a net negative 32 percentage points (28 point 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 and expansion. For those reporting lower earnings compared to the previous three months, 55 percent cited weaker sales, two percent blamed rising labor costs, six percent higher materials costs, two percent higher insurance costs, and nine percent blamed lower selling prices. Two percent blamed taxes and regulatory costs. Owners continued to hold the line on compensation, with eight percent reporting reduced worker compensation and 13 percent reporting gains. Seasonally adjusted, a net four percent reported raising worker compensation, only six points better than February's record low reading of net negative two percent. Labor costs are still under control, one of the major factors affecting inflation pressures. In past recovery periods, compensation improved at a much faster pace than we have experienced in this recovery period.

Credit Markets
Regular NFIB borrowers, (29 percent accessing capital markets at least once a quarter, a survey record low) continued to report some difficulties in arranging credit. A net 13 percent reported loans harder to get than in their last attempt, unchanged from May. Overall, 90 percent of the owners reported all their credit needs met (or they did not want to borrow). Six percent of the owners reported "finance" as their top business problem (up three points). Pre-1983, a smany as 37 percent cited financing and interest rates as their top problem. What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities. The percent of owners reporting higher interest rates on their most recent loan was six percent, while three percent reported lower rates. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted netnegative 13 percent (more owners expect that it will be "harder" to arrange financing), one point worse than May. The business news reports that credit conditions are about as easy as the Federal Reserve can make them, but this has not produced any improvement in the percent of owners expecting it to become easier to satisfy their financial needs.

COMMENTARY

The U.S. economy faces hurricane force headwinds and the government is at the center of the storm, making an economic recovery very difficult. While political leaders trumpet their ideological attempts to remake the economy and save "small business," more and more ordinary folks are wondering what in the world are they thinking. Either policymakers have no idea how to help the economy or they are intentionally committing it to unsustainable expenditure growth and deficits so large that there will be no alternative but to raise taxes, a slow suicide for a dynamic economy.

Fear is growing that the "lame duck" seesion is not so lame and could produce legislation that permanently paralyzes the economy. Cities, states and even sovereign countries are teetering on the brink of bankruptcy while government workers and favored union workers reap benefits and wages far better than their private sector counterparts. With an unemployment rate of nearly 10 percent, the President travels the country touting the health care bill that few like, selling wealth redistribution and the need for more taxes. What should ordinary citizens and small businesses owners expect from all this? A growing and more dynamic economy? Not likely.

In six months, the so-called "Bush Tax Cuts" expire, which will trigger one of the largest tax increases in history. The worst financial fiascos, including Fannie, Freddie, AIG, GM and others, have not yet been addressed exposing taxpayers to hundreds of billions in losses. Instead, Congress is trying to tax successful businesses. Taxing "success" is a terrible path to growth and real investment. And adding to the misery and pessimism, massive government deficits threaten future capital availability for the private sector.

Paul Krugman in his N.Y. Times op-ed July 9 said, "If we want stronger business spending, we need to give businesses a reason to spend. And to do that, the government needs to start doing more, not less, to promote overall economic activity." Krugman's view seems to be shared by Washington, looks like he, as well as Congress, still don't get it.

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

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2010, the NFIB retains ownership. All Rights Reserved.