Small Business Economic Trends - October 2009

Optimism Index
The Index of Small Business Optimism gained 0.2 points, rising to 88.8 (1986=100), 7.8 points higher than the survey's second lowest reading reached in March 2009. The gain was minor, so the good news is still that the Index did not decline. But all in all, the gain is less than was hoped for. Four of the ten Index components posted gains, two were unchanged, and four declined. The biggest problem continues to be poor sales, as 32 percent said "weak sales" was their top business problem.

Labor Markets
In September, small business owners reported a decline in average employment per firm of 0.83 workers reported during the prior three months, a big improvement from May but virtually no change from July and August and historically the 6th largest loss per firm in the 35 year survey history (the record is -1.26 in May 2009). Seven percent of the owners increased employment and 23 percent reduced employment, yielding a seasonally adjusted net -16 percent of owners decreasing employment in the last three months, unchanged from August. Eight percent (seasonally adjusted) reported unfilled job openings, also unchanged from August. Over the next three months, 16 percent plan to reduce employment (up three points), and seven percent plan to create new jobs (unchanged), yielding a seasonally adjusted net negative four percent of owners planning to create new jobs, a four point deterioration from last month.

Capital Spending
The frequency of reported capital outlays over the past six months fell one point to 44 percent of all firms, a record low reading. Plans to make capital expenditures over the next few months rose two points from a 35 year record low to 18 percent. Nine percent characterized the current period as a good time to expand facilities, up four points from August, a good sign. However, a net eight percent expect business conditions to improve over the next six months, down two points from August but 11 points ahead of the July reading.

Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months remained negative at -26 percent, up a point and eight points better than the record low set in March and revisited in June and July. Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. A net negative 24 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), three points better than the record low of negative 27 recorded each month from April through July.

Inflation
The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 32 percent reported price reductions. Seasonally adjusted, the net percent of owners raising prices was negative 21 percent, a two points decline from August. Far more owners are cutting prices than raising them. Plans to raise prices fell two points to a net seasonally adjusted six percent of owners, 32 points below the July 2008 reading. On the cost or input side, the percent of owners citing inflation as their number one problem was steady at four 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. Not seasonally adjusted, 14 percent reported profits higher (down two points), but 50 percent reported profits falling (unchanged). Weak sales and price cuts are responsible for much of the weakness in profits. Owners continued to reduce compensation at a record pace, with 11 percent reporting reduced worker compensation. Reports of increased compensation did rise two points to 14 percent, a good sign in this environment. Seasonally adjusted, a net seven percent reported raising worker compensation, up one point from August but only four points above June's record low reading - an improvement, but small.

Credit Markets
Thirty-three (33) percent reported regular borrowing, typical of the post-1983 period, down a point from July. 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. Thirty (30) percent reported all their borrowing needs met (unchanged) compared to 10 percent who reported problems obtaining desired financing (up three point, not seasonally adjusted). The net percent of owners reporting loans harder to get was unchanged at 14 percent of all firms. But only four percent of the owners reported "finance" as their #1 business problem. Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. The percent of owners reporting higher interest rates on their most recent loan was nine 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 net negative 15 percent (more owners expect that it will be "harder" to arrange financing), two points worse than the August reading. Owners do not see credit conditions easing much in spite of the Federal Reserve's hugely expansionary policies.

COMMENTARY

Although third quarter real Gross Domestic Product growth will likely be over three percent (a stunning improvement from the six percent shrinkage in the first quarter), the surge has not shown up on Main Street as of yet. Reported capital spending was at a survey-low level (started in 1973). More firms plan more inventory reductions than plan to increase employment. Quarterly repoerts on sales reveal 41 percent experiencing declines compared to 21 percent reporting quarterly gains. Quarterly profit trends are the worst in survey history, with 50 percent reporting declines compare to 14 percent reporting gains.

And owners are not looking for a lot of improvement. About 40 percent expect real sales volumes to decline in the coming months in contrast to about 25 percent expecting gains. Only seven percent think the current period is a good time to expand, near the survey low. Credit markets are expected to remain difficult for those wanting to borrow, but with inventory investment and capital spending plans near historic lows, it is clear that loan demand (not the supply of credit) is weak. Legislative activities in Washington undoubtedly dampen the outlook with talk about health care mandates, cap and trade, card check, and new taxes on all sorts of goods and services. Many will wonder if it is worth the effort to try to grow the firm.

Now, some in Congress are considering "Stimulus II," which may take the form of a jobs tax credit similar to that enacted in 1976-77. Some feel this was a successful program, creating new jobs. But it is likely that "government job creation" is an oxymoron. Such a program does not pass a simple "smell test" of logic. Even a minimum wage worker costs about $20,000 (all in). For example, who would spend $20,000 to get a $5,000 credit if there were no use for the worker (e.g. the worker could not generative more than $15,000 in revenue to cover the cost of hiring). Firms will not hire people to just stand around, and cannot pay workers more than the revenue they generate for the firm. WIth weak consumer demand, more workers are apparently not needed and owners are not hiring. A jobs credit will not bring in more sales.

Such a program, if passed, would be the "cash for clunkers" program for the job market. Hiring might be delayed in anticipation of the program if it is propsed in Congress and debated for a period of time and, unless prevented, might induce some firms to release workers and re-hire them as "new." Such a program will involve red tape and complex formulas to compute credits, and most, if not all, of the money will be paid for workesr that would be hired anyway. All this would not induce many consumers to increase their spending, the top need indentified by business owners. Labor is cheap, customers are needed. Maybe giving the money to consumers would be simpler. When consumer spending picks up, firms will have reason to hire.

This survey was conducted in September 2009. A sample of 3,388 small-business owners/members was drawn. Eight hundred twenty-seven (827) 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.