Small Business Economic Trends - November 2008
SUMMARY
Optimism Index
October's churning economic activity clearly worried small business owners. The National Federation of Independent Business Index of Small Business Optimism fells 5.4 points to 87.5 (1986=100), the third lowest reading in the 35-year history of the survey.
Labor Markets
Forty-six (46) percent of the owners hired or tried to hire (down 3 points), and 76 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. Eight percent of the owners reported that the availability of qualified labor was their top business problem, down from 17 percent in September 2007. Fourteen (14) percent (seasonally adjusted) reported unfilled job openings, down four points from September (the 34 year average is 22 percent), anticipating another up tick in the unemployment rate. Over the next three months, a seasonally adjusted net-zero percent of owners plan to create new jobs, 7 points lower than September and one of the lowest readings in survey history. Only the 1974-75 and 1980-82 recession periods produced lower readings.
Capital Spending
Plans to make capital expenditures over the next six monthys fell two points to 19 percent. This reading was last this low in 1975 and only lower at 16 percent in 1974. Five percent characterized the current period as a good time to expand facilities, down 6 points - the lowest reading since 1982, and the second lowest in survey history. A net-negative 4 percent expect business conditions to improve over the next 6 months, an 18 point decline from September, but far from a record-low level.
Inventories and Sales
Small business owners continued to liquidate inventories. A net-negative 13 percent of owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), the 7th negative double-digit month and the 17th negative month in a row. For all firms, a net-negative 4 percent (3 points worse than September) reported stocks too low, seasonally adjusted. The net percent of all owners, seasonally adjusted reporting higher sales in the past 3 months lost 10 points, falling to a net-negative 21 percent, the worst reading in survey history. Expectations for gains in real sales also declined, falling 14 points to a net-negative 16 percent who expect improvements (the 2nd worst reading in survey history). Poor sales expectations produced a decline in plans to add to inventories with the net percent planning to add to stocks falling 2 points to a net-negative 5 percent of all firms, seasonally adjusted. Seasonally adjusted, 10 percent plan to add to stocks (unchanged), while 20 percent will reduce stocks (up 4 points).
This survey was conducted in October 2008. A sample of 10,799 small business owners/members was drawn. One thousand eight hundred twenty-seven (1992) usable responses were received - a response rate of 18 percent.
SUMMARY
Inflation
Price pressures continue to abate with sales trends now at recession levels. The net percent of owners reporting higher average selling prices dropped 5 points to a net 15 percent in October, seasonally adjusted, down 17 points since July. Unadjusted, 29 percent reported raising average selling prices, down 5 points, and 17 percent reported lower selling prices, up 2 points from September. The percent of owners citing inflation as their No. 1 problem fell 5 points to 11 percent, about half its level a few months ago. Plans to raise prices fell 6 points to a net, seasonally adjusted 18 percent of owners, 20 points below the July reading, signaling good news for the Federal Reserve.
Profits and Wages
The net percent of owners reporting earnings gains was unchanged in October and at a dismal level. Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 35 percentage points. with a decline in the percent of firms raising selling prices, it has become harder to pass on the pressures from "backdoor inflation", one of the top-rated business problems. The percent of all firms reporting higher employee compensation fell 2 points to 15 percent of all firms, but this was not enough to support profit improvement. For those reporting lower earnings compared to the previous 3 months (41 percent, down 4 points), 59 percent cited weaker sales (up 18 points), 27 percent cited higher materials costs (including energy), and 10 percent blamed lower selling prices. Two percent each cited higher insurance costs, higher labor costs or higher taxes for the adverse performance of profits.
Credit Markets
As the economy weaknes, loan demand continues to be soft. Only 33 percent reported regular borrowing, a point higher than September, but historically low (the 35-year low is 31 percent). Because of the slowdown in the economy, the credit worthiness of potential borrowers has deteriorated over the last year, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards) for some owners. Thirty-one (31) percent reported all their borrowing needs met compared to 6 percent who reported problems obtaining desired financing. The net percent reporting borrowing needs satisfied was down 2 points from September. The net percent of owners reporting loans harder to get fell 2 points to 9 percent of all firms from its cyclical high of 11 percent reached in September. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net-negative 16 percent (more owners expect that it will be harder to arrange financing), 3 points worse than September (the average was a net-negative 8 percent in 2007). Owners expect deteriorating economic conditions to make borrowing more difficult.
COMMENTARY
Unfortunately, 2 months of improved optimism did not start a trend, owner optimism plunged to heavy duty recession level readings in October. The only Index component that did not worsen out of the 10 was one already at historically low levels (profit trends). The July Index reading was recession low, but was then followed by 2 up months. October, however, would seem to be the proverbial "nail." Case closed. Tough times ahead. Some would argue that we have been in recession since September, 2007 (and the NBER may ultimately agree, although it appears the economy probably peaked in the last 2 months of 2007). Economic growth has been bouncing around, 4.8 percent in the second and third quarters of 2007, -0.2 percent in the fourth (and 2.0 percent year over year for 2007, not great), 0.9 percent in the first, 2.8 percent in the second and now -0.3 percent in the third quarter this year. Not a bump and grind recession. However, it appears we are about to get serious about it.
The net percent of owners planning to create new job sis 0 (5 lower readings are in 1974-75 and 1980-82 periods). The percent with unfilled openings is the lowest since 1992 (but still better than in 1990-92 and 1980-82 periods). Reports of declining sales are the largest in survey history. Planned capital expenditures posted the second lowest reading in 35 years. Inventory investment plans were the sixth lowest in survey history. Overall, not a good picture, and it is hard to find any good news. The frequency of price hikes is still coming down, but is still too high to get inflation into the Fed's range. But the indicators of real economic activity are weak. Gross Domestic Product will fall again and unemployment will rise (job loss on Main Street, in addition to layoffs on Wall Street and at major companies like GM).
Some small business owners who were clients of the "mega" banks are probably having some difficulty, as these big banks have less capital to lend (several banks abandoned programs that financed fast food franchisees). Many small banks are advertising their soundness and willingness to lend to attract these potential new customers. Any owner with a variable rate loan or credit line i benefiting, rates are down 100 basis points just in October. Fixed rate loans typically re-price every 5 years. Since the Fed is very likely to reverse policy in the near future, lenders will be somewhat averse to making many fixed-term commitments at low fixed rates. They are likely to be "losers" before the first "re-set" anniversary as the Fed will almost surely be raising rates before then.
In the middle of all this, we will be changing "management teams" for USA Inc. (over $14 trillion in revenue). Congress is ready to unleash a barrage of new programs (tax cuts, elimination of secret ballots for unionization, a "re-think" on NAFTA, and many more). President Obama will find it difficult to say "no" as much was promised on the campaign trail. The budget is headed into new deficit territory, unemployment is headed up, and inflation isn't the best. Good luck, America, we'll need it.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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