NFIB SMALL BUSINESS ECONOMIC TRENDS 2011
The Index of Small Business Optimism gave up 2.6 points in March,
falling to 91.9. Four components rose or were unchanged, while six lost
ground. The “hard” components of the Index (job creation, job openings,
capital spending plans and inventory plans) added two points while the
“soft” components (the other six in the table above) gave up 31 points.
Index was driven by weaker expectations for real sales gains and business
conditions and a marked deterioration in profit trends. The decline in the
percent of owners expecting higher real sales and better business
conditions in six months alone account for 76 percent of the decline in the
Fifteen (15) percent, seasonally adjusted, reported unfilled job openings,
unchanged from February. Over the next three months, 18 percent plan to
increase employment (up 1 point), and 6 percent plan to reduce their
workforce (unchanged), yielding a seasonally adjusted net 2 percent of
owners planning to create new jobs, down 3 points from February, not
great but still positive. This is historically low, especially for a recovery
period. While these few new jobs are nudging the unemployment rate
down, they do not make much of a dent in the pool of unemployed.
The frequency of reported capital outlays over the past six months rose 2
points to 51 percent of all firms. But despite the improvement, this is still
a “recession level”. Capital spending remains historically low in spite of
very low interest rates and all sorts of expensing incentives. The problem is
that “cheaper” equipment is still no bargain if you cannot use it. The
percent of owners planning capital outlays in the future rose 2 points to 24
percent, an improvement but still historically quite low. Money is cheap,
but most owners are not interested in a loan to finance equipment they do
not need. Prospects are still uncertain enough to discourage any but the
most profitable and promising investments.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher
nominal sales over the past three months worsened by 1 point to a net
negative 12 percent, 22 points better than the recession low reading in
March 2009 (near the recession bottom), but still indicative of weak
customer activity. The net percent of owners expecting higher real sales
fell eight points to a net 6 percent of all owners (seasonally adjusted). This
is bad news for hiring and inventory investment. Small business owners
continued to liquidate inventories but at the lowest frequency in 35
months. A net negative 7 percent of all owners reported growth in
inventories (seasonally adjusted), a 1 point improvement.
In March, a net 9 percent reported raising average selling prices, a gain of
33 percentage points from the low reading in 2009 and 20 points more than
last September! Inflation is back on Main Street. In March, 24 percent
planned hikes in average selling prices with many by 10 percent or more.
A major force behind the price hikes is the elimination of inventory
excesses which appeared in 2008 when consumers decided to raise their
saving rate from 1 percent to about 6 percent, a reduction in consumption
spending of about half a trillion dollars. The “fire sale” is over and profits
are badly in need of some price support. Note that these hikes started
before higher gas and energy prices became a real issue except for
transportation firms and those with delivery services. Plans to raise prices
rose 3 points to a net seasonally adjusted 24 percent of owners, the highest
reading in 30 months. With an improving economy, more and more of
these hikes will “stick”.
PROFITS AND WAGES
Reports of positive earnings trends deteriorated in March, registering a net
negative 32 percent, 5 points worse than February. Seventeen (17) percent
of the owners reported cutting prices, contributing to weaker earnings.
Price cutting is evaporating. Large firms may be posting great profits, but
the trend on Main Street is not supportive of solid hiring and capital
spending. Costs for energy, materials and labor, and higher interest rates
2 | NFIB Small Business Economic Trends Monthly Report
are not the problem; these are yet to come. It is still weak sales. Seasonally
adjusted, a net 7 percent reported raising worker compensation, down 1
point. But reported gains in the first quarter are the strongest since the
fourth quarter of 2008. A seasonally adjusted 9 percent plan to raise
compensation, up 2 points and the highest reading since November 2008.
Overall, 93 percent reported that all their credit needs were met or that they
were not interested in borrowing. Seven percent reported that not all of
their credit needs were satisfied, and 53 percent said they did not want a
loan. Four percent reported financing as their #1 business problem.
Twenty-five (25) percent of the owners reported that weak sales continued
to be their top business problem (down 3 points), followed by 17 percent
citing taxes and 17 percent government regulations and red tape. The
historically high percent of owners who cite weak sales means that for
many owners, investments in new equipment or new workers are not likely
to “pay back”. This is a major cause of the lack of credit demand observed
in financial markets along with the deficiency in housing starts, a million
units below “normal”. Twenty-nine (29) percent of all owners reported
borrowing on a regular basis, 1 point above the record low. A net 8 percent
reported loans “harder to get” compared to their last attempt (asked of
regular borrowers only), down 3 points. Credit availability is not holding
back loan growth, it is a lack of demand.
Optimism faded, and is still at recession levels. Maybe it is a “new
normal”. Maybe we will not see the surges we experienced at the start of a
recovery. Times are different, government is a larger drag all the time. It
wants more taxes and imposes more restrictions. New York has a new
bureaucracy to help new restaurant owners get through the bureaucracy.
How insane! Uncertainty is still huge and it clouds the future. Leadership
does not do things that make sense to those who create jobs and wealth,
only to those who take it. Inflation is coming back, a little too soon with so
much slack in the economy. Although the rhetoric in Washington continues to suggest that a major reason for the slow recovery has been that banks will not lend to creditworthy borrowers, the evidence from the NFIB survey of hundreds of thousands of small firms suggests that this is not the case. The economy generated a lot of jobs by making bad loans (the housing bubble mess), and they are gone now. We could generate more jobs by making more bad loans, but the price paid will be even larger than this past recession. All
through the “credit crisis”, the percent of small business owners
complaining about financing problems stayed near 35 year low levels.
Community banks across the country report that they have money to lend,
but the pipeline of good applicants collapsed in the recession as the NFIB
data show. Only a few firms complain that all their credit needs were not
met. More than half do not even want a loan. The decline in house prices
has indeed reduced the amount of home equity available to owners, but not
below pre-2007 levels. As we learned, pre-recession real estate equity was
not real, just as the equity in the dot.com bubble was not real and certainly
could not be used as real “collateral”. The Federal Reserve has but one real
policy tool – interest rates. But rates are not the only variable in the hiring
and investment (real, not financial) equations. Relying on interest rate
adjustments is akin to pushing on a string. The SBA and the Treasury can
keep creating lending facilities of various types but that is not the problem
and so far they have had little impact. Community banks are happy to
engage in real banking and will make loans once businesses find a good
reason to borrow.
On the job side, it is going to take a rebound in consumer spending,
particularly in the service sector to make a significant dent in the number
of unemployed. The manufacturing sector is doing very well, but it does
not create many jobs. Consumers continue to “de-leverage” so spending
will recover slowly as they regain their financial footing. Unfortunately,
the increase in energy costs will not help. Progress will be slow.