Small Business Economic Trends - November 2009

Bill Dunkelberg


Optimism Index
The Index of Small Business Optimism gained 0.3 points, rising to 89.1 (1986=100), 8.1 points higher than the survey's second lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980:2). In the 1980-82 recession period, the Index was below 90 in only one quarter. In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn. The October gain was minor, so the good news is still less bad news. Four of the ten Index components posted gains, two were unchanged, four declined.

Labor Markets
Eight percent (seasonally adjusted) reported unfilled job openings, unchanged from August and September. Over the next three months, 16 percent plan to reduce employment (unchaged), and nine percent plan to create new jobs (up two points), yielding a seasonally adjusted net-negative one percent of owners planning to create new jobs, a three point improvement. In the last three months, eight percent of the owners increased employment, but 19 percent reduced employment (seasonally adjusted), both statistics are better than September readings. However, the job generating machine is still in reverse.

Capital Spending

The frequency of reported capital outlays over the past six months rose one point to 45 percent of all firms, one point above the record low reading logged in September. Capital spending, and the demand for credit to financing it, is on the sideline. Plans to make capital expenditures over the next few months fell one point to 17 percent, just one point above the record low last set in August. Seven percent characterized the current period as a good time to expand facilities, down two points from September. A net 11 percent expect business conditions to improve over the next six months, up three points from September but historically low.

Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months remained low at negative at 31 percent, down five points and only three points above the record low last set in July. Widespread price cutting continued to contribute to reports of lower nominal sales. After a one point drop in September, the net percent of owners expecting real sales gains improved two points to a negative four percent of all owners, still negative but 27 points better than the March record low level. A net-negative 26 percent of all owners reported gains in inventory stocks, two points worse than September. For all firms, a net-negative three percent (down three points) reported stocks too low. Plans to add to inventories improved three points to a negative three percent of all firms (seasonally adjusted).

The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 30 percent reported price reductions. Seasonally adjusted, the net percent of owners raising prices was negative 17 percent, far more cutting prices than raising them. Plans to raise prices fell one point to a seasonally adjusted
net five percent of owners, 33 points below the July 2008 reading. 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) fell two points to two percent, so neither labor costs nor materials costs are pressuring owners.

Profits and Wages
Reports of positive profit trends were unchanged at a net negative 40 percentage points. The persistence of this imbalance is bad news for the small business community and a contributor to the reported difficulties in obtaining credit. No doubt we are losing firms in this recession. For those reporting lower earnings, compared to the previous three months (52 percent, up two points), 62 percent cited weaker sales, four percent each blamed rising labor costs and higher materials costs, two percent blamed higher insurance costs, and eight percent blamed lower selling prices. Four percent blamed regulatory costs.

Owners continued to reduce compensation at a record pace, with 11 percent reporting reduced worker compensation. Reports of increased compensation fell three points to 11 percent. Seasonally adjusted, a net four percent reported raising worker compensation, down three points from September and only one point above June's record low reading.

Credit Markets
For those who want to borrow, getting a loan continues to be difficult, with a net 14 percent reporting loans harder to get than in their last attempt. Thirty-three (33) percent reported regular borrowing, unchanged from September. Overall, loan demand remains weak due to widespread postponement of investment in inventories and record low plans for capital spending. In addition, the continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers. This has resulted in toughter terms and higher loan rejection rates (even with no change in lending standards), and there is no rush to borrow money like that observed in the pre-1983 period when regular borrowers made up over 50 percent of all owners (even with a 21 percent prime rate of interest).

Twenty-nine percent reported all their borrowing needs met (down 1 point) compared to 9 percent who reported problems obtaining desired financing (down 1 point, not seasonally adjusted).


The Administration has recently jumped on the "small business bandwagon," although little important action has been taken. It sounds like the Administration thinks the reason small firms are not hiring is that they are not able to get credit. Although credit is harder to get, "financing" is cited as the "most important problem" by only four percent of NFIB's hundreds of thousands of member firms. Although a nice gesture, enhacing SBA lending programs will not help much - too many owners have no reason to borrow. Record low percentages cite the current period as a good time to expand, more owners plan to reduce inventories than to add to them, and record low percentages plan any capital expenditures. In short, the demand for credit is in short supply and failing to understand the more major problems facing small business leads to bad policy. Less than one percent of small businesses have government sponsored loans, so the reach of this new policy will not be large. What small business needs is customers, but very little in the "stimulus" provided consumer spending support and all Washington talks about now is raising taxes and passing health care, likely a job destroyer. A $500 billion payroll tax cut last January would have been helpful as opposed to the "earmarks" in the stimulus bill for which spending has not even started, but such suggestions were squashed.

Statistically, we are in a huge "V" recovery, with Gross Domestic Product rebounding from a 6.4 percent decline in the first quarter to 3.5 percent growth in the third. That is quite a "comeback," a very steep "V." But unless the consumer comes back, the recovery is likely to turn into the "square root recovery," slower, flatter growth on the recovery leg of the V. Federal government spending rose over seven percent but most of the reported jobs "saved or created" were in the public sector. Although there are benefits to this spending )better schools or some road repairs, for example) the average amount spent per reported job saved or created is nearly $250,000 - and many of these "saved" jobs were counted when an existing employee got a raise!

Overall, the small business job machine is still in reverse, due to continued declines in reported sales, rising labor costs, and a need to cut costs. Reported capital spending is at historic low levels, owners are still, ob balance, reducing inventory stocks (only seven percent reported increases, 32 percent reported reductions) so orders to wholesale and manufacturing firms for new inventory are weak. Price cutting is rampant (though slowing) which combines with lower real sales continues to produce record reports of earnings declines, one reason capital spending remains low. Few firms report credit availability as a problem, though those who are borrowing report more difficulty and tougher terms than during the expansion. Events in Washington are not supportive of more optimism about the future - another reason not to spend or hire.

This survey was conducted in October 2009. A sample of 10,799 small-business owners/members was drawn. Two thousand fifty-nine (2059) 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.

Print page