Small Business Economic Trends - August 2009
SUMMARY
Optimism Index Optimism faded a bit for consumers and business owners over the past few months, primarily due to weaker expectations about economic growth. This is a bit unexpected in light of the increasing frequency of reported good signs about the economy and the stock market. Assuming the recession started in January 2008, we have been in recession 19 months, far longer than the post-war average of nine months and the end is still illusively in the future. For consumers and business owners, "emergency" reserves are depleted, jobs have not returned, and the stimulus seems to have failed on the ground (even if observers agree its effects are yet to come, expectations were set for a quick rescue). The recession is wearing Main Street folks down. This survey was conducted in July 2009. A sample of 10,799 small-business owners/members was drawn. One thousand nine hundred ninety-four (1994) usable responses were received - a response rate of 18 percent. Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
The National Federation of Independent Business monthly Small Business Economic Trends survey reports small business owner optimism fell 1.3 points to 86.5, producing the second monthly decline in a row (but still above the March reading of 81.0, the lowest reading of this recession). The main cause was a decline in expectations that business conditions would improve in six months.
Labor Markets
Nine percent (seasonally adjusted) reported unfilled job openings, down two points from June. Over the next three months, 14 percent plan to reduce employment (up four points), and eight percent plan to create new jobs (down two points), yielding a seasonally adjusted net negative three percent of owners planning to create new jobs, a two point deterioration. 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 reduced worker compensation and 12 percent reporting higher worker compensation. Seasonally adjusted, a net six percent reported raising worker compensation, up three points from June's record low reading. The twelve month inflation rate remained negative, and average real hourly compensation has actually risen over the past 12 months.
Capital Spending
The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, well below year ago levels. Plans to make capital expenditures over the next few months rose one point to 18 percent, historically very low. Five percent characterized the current period as a good time to expand facilities, up one point from June. A net negative three percent expect business conditions to improve over the next six months, down 10 points from June and down 15 from May. Overall, a dismal performance.
Inventories and Sales
Small business owners continued to liquidate inventories. A net negative 27 percent of all owners reported gains in inventory stocks, unchanged since April, all record lows. row. It is hard to believe there is anything left on the shelves. A net negative four percent (a one point improvement) of owners reported stocks too low. And the net percent of all owners (seasonally adjusted) reporting higher sales in the past three months remained at a net negative 34 percent, equal to the record low set in March. It is hard to keep the inventory to sales ratio in balance when sales keep falling. Plans to add to inventories improved a point but remained negative at a net negative 5 percent of all firms (seasonally adjusted) in sympathy with the continued weakness in expected real sales gains.
Inflation
In July, 11 percent of small business owners reported raising their average selling prices (down two points) over the last three months, while 31 percent reported reductions in average selling prices (unchanged). No inflation in those numbers. Seasonally adjusted, the net percent of owners raising prices was a net negative 19 percent, far more cutting prices than raising them. Plans to raise prices were unchanged at a net seasonally adjusted five percent of owners, 33 points below the July 2008 reading.
Profits and Wages
Reports of positive profit trends deteriorated three points to a net negative 45 percentage points. The fact that these negative reports persist is bad news for the small business community. Reports of earning declines are at record high levels because of weak demand and widespread price cuts. Wage pressures are also falling as owners not only reduce employment but also the compensation of remaining workers. But these cost reductions are not enough to firm up profits. Seasonally adjusted, a net six percent reported raising compensation, up three points from the record low set in June. For those reporting lower earnings compared to the previous three months (52 percent, down three points), 64 percent cited weaker sales, four percent blamed rising labor costs, six percent blamed higher materials costs, two percent blamed higher insurance costs, and eight percent blamed lower selling prices. Two percent blamed higher financing costs and four percent blamed regulatory costs.
Credit Markets
Thirty-three (33) percent reported regular borrowing, typical of the post-1983 period. Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending. 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 10 percent who reported problems obtaining desired financing (unchanged, not seasonally adjusted). The recession is now 19 months old, much longer than any since the 1980-82 period, so more "stress" is likely as owners wait for customers to show up and cash flow to improve. The net percent of owners reporting loans harder to get rose a point to 15 percent of all firms. But only four percent of the owners reported "finance" as their #1 business problem, down two points from June.
COMMENTARY
Consumer spending fell in the second quarter, after posting a small gain in the first quarter, important because consumption accounts for 70 percent of gross domestic product, Half of all consumer spending is accounted for by the top 20 percent of the income distribution. The Reuters/University of Michigan survey found that these consumers reported an unusually high level of personal financial distress. On top of that, they are the target of new tax increases that would further erode their financial well being. Reports outright declines in income reached 27 percent, eclipsing the prior record of 17 percent in 1982, the last serious recession. In 2006, 44 percent thought their savings insured an adequate retirement compared to only 10 percent earlier this year. Rebuilding wealth (more saving and less consumption) is holding the spending recovery back.
The job market indicators are not showing any strength, then again the supporting factors such as sales and profits are not providing the signals needed to encourage hiring. Hopefully, the "firing" will slow, as suggested by the NFIB data which signal a decline in the unemployment rate toward nine percent, not great, but not higher. Capital spending and inventory investment remain weak, posed for an upward push, but again the profit and sales trends are not supportive. Credit markets remain "unfriendly," but few owners complain that it is a top problem (although one in 10 report their credit needs are not being met).
Inflation is not a near-term threat with only a few owners planning to raise prices, many are still cutting. Only four percent report problems with labor quality - many good workers are available. And labor costs are not a problem either, nor are they likely to be for some time. Compensation increases are at historically low levels.
That said, the private sector is clawing its way back. More houses are being sold, more are being built, and the manufacturing sector is showing signs of stabilizing. Housing prices have started rising and the stock market has rebounded, helping to rebuild (perceived) wealth. Car sales are also improving. Our last year's forecast of two percent growth in the third quarter and four percent in fourth quarter still looks doable.
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