Small Business Owners Skeptical of Economic Recovery

Contact: Melissa Sharp 202-314-2068

WASHINGTON, November 10, 2009 – The NationalFederation of Independent Business Index of Small Business Optimismgained 0.3 points in October, rising to 89.1 (1986=100), 8.1 pointshigher than the survey’s second lowest reading reached in March (thelowest reading was 80.1 in the second quarter of 1980).  In the 1980-82recession period, the Index was below 90 in only one quarter.  In thisrecession, the Index has been below 90 for six quarters, indicative ofthe severity of this downturn.

“The October gain was minor, so the good news is still less bad news,”said William C. Dunkelberg, NFIB chief economist.  Four of the tenIndex components posted gains, two were unchanged, and four declined.  

Employment
Eight percent (seasonally adjusted) reported unfilled job openings,unchanged from August and September.  Over the next three months, 16percent plan to reduce employment (unchanged), and 9 percent plan tocreate new jobs (up 2 points), yielding a seasonally adjustednet-negative 1 percent of owners planning to create new jobs, a 3 pointimprovement. In the last three months, 8 percent of the ownersincreased employment, but 19 percent reduced employment (seasonallyadjusted), both statistics are better than September readings.However, the “job generating machine” is still in reverse.

Owners continued to reduce compensation at a record pace, with 11percent reporting reduced worker compensation.  Reports of increasedcompensation fell 3 points to 11 percent.  Seasonally adjusted, a net 4percent reported raising worker compensation, down 3 points fromSeptember and only 1 point above June’s record low reading.  

Capital Spending
The frequency of reported capital outlays over the past six months rose1 point to 45 percent of all firms, 1 point above the record lowreading logged in September (data first collected in 1979).  Capitalspending, and the demand for credit to finance it, is on the sideline.Plans to make capital expenditures over the next few months fell 1point to 17 percent, just 1 point above the record low last reached inAugust.  Seven percent characterized the current period as a good timeto expand facilities, down 2 points from September.  

A net 11 percent expect business conditions to improve over the nextsix months, up 3 points from September but historically low.  Consumerspending is weak, recent reports on consumer sentiment arediscouraging, and there is nothing on the table in Washington to makeowners more optimistic about the future, a recipe for depressedexpectations and spending plans.

Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting highersales in the past three months remained low at negative 31 percent,down 5 points and only 3 points above the record low last set in July.Unadjusted, 17 percent of all owners reported higher sales (down 4points), and 44 percent reported lower sales (up 3 points).  Widespreadprice cutting continued to contribute to reports of lower nominalsales.  After a 1 point drop in September, the net percent of ownersexpecting real sales gains improved 2 points to a negative 4 percent ofall owners, still negative but 27 points better than the March recordlow level.

Small business owners continued to liquidate inventories, and weaksales trends gave little reason to order new stocks.  A net-negative 26percent of all owners reported gains in inventory stocks (more firmscut stocks than added to them, seasonally adjusted), 2 points worsethan September, and only 1 point better than the record low of negative27 recorded April through July.  For all firms, a net-negative 3percent (down 3 points) reported stocks too low.  Plans to add toinventories improved 3 points to a negative 3 percent of all firms(seasonally adjusted).

Inflation
The weak economy continued to put downward pressure on prices.  Tenpercent of the owners reported raising average selling prices, but 30percent reported price reductions.  Seasonally adjusted, the netpercent of owners raising prices was negative 17 percent, far more arecutting prices than raising them.  Plans to raise prices fell 1 pointto a seasonally adjusted net 5 percent of owners, 33 points below theJuly 2008 reading.  On the cost or input side, the percent of ownersciting inflation as their number one problem (e.g. costs coming in the“back door” of the business) fell 2 points to 2 percent and only 4percent cited the cost of labor, so neither labor costs nor materialscosts are seriously pressuring owners.

Earnings
Reports of positive profit trends were unchanged at a net-negative 40percentage points.  The persistence of this imbalance is bad news forthe small business community and a contributor to the reporteddifficulties in obtaining credit.  No doubt we are losing firms in thisrecession.  For those reporting lower earnings compared to the previousthree months (52 percent, up 2 points), 62 percent cited weaker sales,4 percent each blamed rising labor costs and higher materials costs, 2percent blamed higher insurance costs, and 8 percent blamed lowerselling prices.   Four percent blamed regulatory costs.

“Poor sales and price cuts are responsible for much of the weakness in profits,” said Dunkelberg.

Credit
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 lastattempt.  With very weak plans to make capital expenditures, add toinventory and expand operations, it would appear that many of thosetrying to borrow are having cash flow difficulties due to very weaksales (most frequently reported as the top business problem).  

Thirty-three percent reported regular borrowing, unchanged fromSeptember.  Overall, loan demand remains weak due to widespreadpostponement of investment in inventories and record low plans forcapital spending.  In addition, the continued poor earnings and salesperformance has weakened the credit worthiness of many potentialborrowers.  This has resulted in tougher terms and higher loanrejection rates (even with no change in lending standards), and thereis no rush to borrow money like that observed in the pre-1983 periodwhen regular borrowers made up more than 50 percent of all owners (evenwith a 21 percent prime rate of interest).

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

“The recession is now 22 months old, straining the financial resourcesof more and more small firms.  The economy may have turned, but it’s aslow turn so far,” said Dunkelberg.