Small Business Economic Trends - June 2009

Bill Dunkelberg


Optimism Index

The Index of Small Business Optimism rose 2.1 points in May to 88.9 (1986=100). Nine of the ten Index components were unchanged or higher in May. The Index is still well below its historical average of 100, but headed in the right direction. Labor market components did not improve, indicating another bad month of numbers. Until small businesses start hiring, employment gains will languish.

Labor Markets

Nine percent (seasonally adjusted) reported unfilled job openings, unchanged from April, relatively stable for the past few months and historically low. Over the next three months, 11 percent plan to reduce employment (up one point), and 12 percent plan to create new jobs (down one point), yielding a seasonally adjusted net negative five percent of owners planning to create new jobs, unchanged from April. It appears that owners are not through with their labor-based cost cutting, but it is slowing. In addition to reducing employment, owners are reducing compensation as well. Reports of compensation cuts and increases remained in record territory, with 10 percent reporting reducing worker compensation and 11 percent reporting raising worker compensation, helping to keep the lid on labor costs. Seasonally adjusted, a net five percent reported raising worker compensation, unchanged from April and one point above the record low reading.

Capital Spending

The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, 10 points lower than year ago levels. Overall, a dismal performance. But the longer the owners postpone, the larger the pool of "pent up demand" for new equipment and improvements and expansion of facilities that will eventually re-start the economy. Plans to make capital expenditures over the next few months rose one point to 20 percent, historically very low, but headed up for the second month in a row. Five (5) percent characterized the current period as a good time to expand facilities, up one point from April and four points from March.

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 which was a record low. Inventories have been reduced at a record pace. The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months gave up five points, falling to a net negative 33 percent, a point higher than the record low set in March. Plans to add to inventories rose four points to a net negative three percent of all firms (seasonally adjusted) in sympathy with the continued improvement in expected real sales.


In May, the net percent of owners raising prices was -22 percent, far more cutting prices than raising them. That translates into "disinflation" and CPI inflation for the past 12 months has been negative, consistent with NFIB reports. As a practical matter, price cutting is likely nearing a bottom, in part because consumer spending is improving a bit and because excess inventories (and companies!) have been removed. The percent of owners citing inflation as their number one problem fell 1 point to 3 percent, the average since the monthly surveys were started in 1986. Eight percent reported increases in average prices of 10 percent or more in July, 2008, compared to 2 percent in May. Eighteen (18) percent reported price hikes of five percent or more in July, 2008, compared to four percent in May. The distribution of reported price decline in May clearly dominates in all price intervals, so average selling prices are falling.

Profits and Wages

Reports of positive profit trends were unchanged at a net negative 43 percentage points, no improvement, still at record low levels. Pricing power has vanished and reports of sales declines are at record high levels because of reduced demand and because of widespread price cuts. Wage pressures are falling as owners not only reduce employment but also the compensation of remaining workers. Ten (10) percent of the owners reported reducing worker compensation, double earlier months and only one point below the survey record high. Only 11 percent reported raising worker compensation, one point better than the survey record low reached in March and April. Seasonally adjusted, a net five percent reported raising compensation, unchanged from April and one point better than the record low reached in March. Weak sales and price cuts are responsible for much of the weakness in profits. Rising labor costs are not an issue.

Credit Markets

Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending. Cash conservation is a top priority in uncertain times. In addition, the credit worthiness of many potential borrowers has deteriorated in the recession, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards). Twenty-eight (28) percent reported all their borrowing needs met (down two points) compared to nine percent who reported problems obtaining desire financing (up one point; not seasonally adjusted). The net percent reporting all borrowing needs satisfied fell 3 points to 19 percent. The percent of owners reporting loans harder to get rose to 16 percent of all firms, the highest reading since the 1980-82 recession period. So, it appears that as the recession drags on, financing becomes more difficult to arrange. But only 5 percent of the owners reported "finance" as their #1 business problem, up a point from April, but statistically unchanged for years. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 15 percent (more owners expect that it will be "harder" to arrange financing), 3 points worse than the April reading.


So far,the economy seems on the course outlined in our predictions last year. We expected a negative five percent in the first quarter (BEA reported -5.7 percent, second revision), negative two percent for the current quarter (some are now anticipating positive growth, but NFIB indicators do not show that much strength), one percent in the third and four percent in the fourth. The "adjustment" to expected economic decline was likely overdone, energized by proclamations of "depression" from Washington, the media, and employees of Wall Street firms. Psychology has played a very important role in this recession. Whatever the cause, people are realizing that we are not headed into depression so spending is picking up cautiously. Housing is tough, even at very low prices, the demand for second homes is limited. Only fundamental demographics combined with the dramatic reduction in new home construction will bring fundamental demand in line with supply.

For whatever reason, owners expect credit conditions to remain difficult, perhaps factoring in the $1.5 trillion in federal borrowing that is anticipated. The government is going to compete with them for domestic saving, making funds less available and more expensive. Borrowing funds to make productive investments is good, borrowing to give money away is not, as no productive resources are created to generate an income flow to repay the debt. Thus, the debt accumulates relative to the income earned by the private sector, an ever increasing burden. Governments cannot repay their debts on their own, they must tax the private sector to do so.

It does appear that the decline in spending for inventory and capital projects has bottomed and will turn up in the coming months. The same cannot be said for job creation. Thirty-eight (28) percent of the owners hired or tried to hire in the past few months, 11 points lower than last year's peak. Sixty-six (66) percent said there were few or no qualified applicants, down from 83 percent in June 2008. A net negative five percent plan to hire in the next three months, five points stronger than March lows (unchanged from April). More firms still plan to reduce employment than plan to increase the number of employees. This would fit the "lagging indicator" characterization of the employment numbers, although if job reduction was overdone, that "lag" should be shorter this time around. It is encouraging that a major factor pushing the unemployment up was a surge in new job seekers rather than layoffs and job losses.

Inflation - not a current problem, price cutting has been wide spread and very few owners expressed an intent to raise prices in the coming months. But this won't last, especially if we are "shutting down" capacity as the recession lingers (e.g. firms going out of business). A rebound in spending could put immediate pressure on stocks and prices. Commodity prices are already on the rise, perhaps due to inflation fears.

Overall, owner optimism is up again, reinforcing the likelihood that April marked the bottom for pessimism and signaled the bottom of the recession. Stay tuned.

This survey was conducted in May 2009. A sample of 3938 small-business owners/members was drawn. Eight hundred fourteen (814) usable responses were received - a response rate of 21 percent.

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2009, NFIB retains ownership. All Rights Reserved.


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