NFIB SMALL BUSINESS ECONOMIC TRENDS 2006 pdf

Over the next three months, seven percent plan to reduce employment unchanged and 14 percent plan to create new jobs unchanged, yielding a seasonally adjusted net one percent of owners p

William C Dunkelberg Holly Wade

June 2010

S M A L L B U S I N E S S O P T I M I S M I N D E X C O M P O N E N T S

Seasonally Change From Contribution

Plans to Increase Employment 1% 2 11%

Plans to Make Capital Outlays 20% 1 6%

Plans to Increase Inventories 2% 4 22%

Expect Economy to Improve 8% 8 44%

Expect Real Sales Higher 5% -1 -6%

Current Inventory 0% -1 -6%

Current Job Openings 9% -2 -11%

Expected Credit Conditions -12% 3 17%

Now a Good Time to Expand 5% 1 6%

Earnings Trend -28% 3 17%

Total Change 18 100%

Based on a Survey of Small and Independent Business Owners

Column 1 is the current reading; column 2 is the change from the prior month; column 3 the percent of the total change

accounted for by each component; * is under 1 percent and not a meaningful calculation.

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quar-terly surveys since 1973 and monthly surveys since

1986 The sample is drawn from the membership files of the National Federation of Independent Business (NFIB) Each was mailed a question-naire and one reminder Subscriptions for twelve monthly SBET issues are $250 Historical and unadjusted data are available, along with a copy

of the questionnaire, from the NFIB Research Foundation You may reproduce Small Business Economic Trends items if you cite the publica-tion name and date and note it is a copyright of the NFIB Research Foundation © NFIB Research Foundation ISBS #0940791-24-2 Chief Econo-mist William C Dunkelberg and Policy Analyst Holly Wade are responsible for the report.

NFIBSMALL BUSINESS

I N T HIS I SSUE

Summary 1

Commentary 3

Optimism 4

Outlook 4

Earnings 6

Sales 7

Prices 8

Employment 9

Compensation 10

Credit Conditions 12

Inventories 14

Capital Outlays 16

Most Important Problem 18

Survey Profile 19

Economic Survey 20

S MALL B USINESS S URVEY Q UESTIONS P AGE IN R EPORT

Are…loans easier or harder to get than they were

three months ago? 12 During the last three months, was your firm able to

satisfy its borrowing needs? 13

Do you expect to find it easier or harder to obtain your

required financing during the next three months? 13

If you borrow money regularly (at least once every three

months) as part of your business activity, how does the

rate of interest payable on your most recent loan compare

with that paid three months ago? 14

If you borrowed within the last three months for business

purposes, and the loan maturity (pay back period) was 1

year or less, what interest rate did you pay? 14 During the last three months, did you increase or decrease

your inventories? 15

At the present time, do you feel your inventories are too

large, about right, or inadequate? 15 Looking ahead to the next three months to six months,

do you expect, on balance, to add to your inventories,

keep them about the same, or decrease them? 15 During the last six months, has your firm made any capital

expenditures to improve or purchase equipment, buildings,

or land? 16

If [your firm made any capital expenditures], what was

the total cost of all these projects? 17 Looking ahead to the next three to six months, do you

expect to make any capital expenditures for plant

and/or physical equipment? 17 What is the single most important problem facing your

business today? 18 Please classify your major business activity, using one

of the categories of example below 19 How many employees do you have full and part-time,

including yourself? 19

The May Index of Small Business Optimism gained 1.6 points, increasing

to 92.2 Not a strong signal of recovery, but it is headed in the right

direction It is the best reading since September 2008 (92.9), just before

the 5.4 point decline in October Seven of the 10 Index components

increased but job creation and capital expenditure plans barely moved and

remain at “recession” levels The duration of recession readings in the

NFIB survey is exceptionally long compared to the 1980-82 recession

period If this is a “V” recovery, it is “lower case.”

LABOR MARKETS

Nine percent (seasonally adjusted) reported unfilled job openings, down

two points and historically very weak Over the next three months, seven

percent plan to reduce employment (unchanged) and 14 percent plan to

create new jobs (unchanged), yielding a seasonally adjusted net one

percent of owners planning to create new jobs, two points better than the

April reading Since the third quarter of 2009, job creation plans have

seriously underperformed the recoveries from the other two deep

recessions covered by the NFIB survey Coming out of the milder 1991

recession, construction added more than 100,000 jobs and 20,000 new

firms in a year's time

CAPITAL SPENDING

The frequency of reported capital outlays over the past six months was

unchanged at 46 percent of all firms, two points above the 35 year record

low reached most recently in December 2009 The percent of owners

planning to make capital expenditures over the next few months rose one

point to 20 percent, four points above the 35 year record low Five percent

characterized the current period as a good time to expand facilities, up one

point However, compared to past recoveries, small business owners’

expectations are far less optimistic of a solid recovery

INVENTORIES AND SALES

The net percent of all owners (seasonally adjusted) reporting higher

nominal sales in the past three months improved four points to a net

negative 11 percent, and up 14 points in the past two months It is the best

reading since April 2008 The net percent of owners expecting real sales

gains lost a point, falling to a net five percent of all owners (seasonally

adjusted) after a nine point gain in April Small business owners continued

to liquidate inventories and weak sales trends gave little reason to order

new stock A net negative 20 percent of all owners reported gains in

inventories, eight points better than December’s record liquidation reading

but two points worse than in April Plans to add to inventories improved

four points to two percent of all firms (seasonally adjusted) adding to a five

point improvement in April

This survey was conducted in May 2010 A sample of 3,938 small-business owners/members was drawn

Eight hundred and twenty-three (823) usable responses were received – a response rate of 21 percent.

The weak economy continued to put downward pressure on prices

Fourteen (14) percent of the owners (down one point) reported raising average selling prices, and 28 percent reported average price reductions (up four points) Such widespread price cutting contributes to the high percentage reporting declining sales revenues Plans to raise prices rose one point to a net seasonally adjusted 14 percent of owners On the cost side, four percent of owners cited inflation as their number one problem (e.g costs coming in the “back door” of the business) and only four

percent cited the cost of labor, so neither labor costs nor materials costs are pressuring owners

PROFITS AND WAGES

Reports of positive profit trends improved by three points in May,

registering a net negative 28 percentage points, 15 points better than May

2009 However, the persistence of this imbalance is bad news for the small business community Profits are important for the support of capital

spending and expansion For those reporting lower earnings compared to the previous three months, 53 percent cited weaker sales, four percent blamed rising labor costs, six percent higher materials costs, four percent higher insurance costs, and six percent blamed lower selling prices Six percent blamed taxes and regulatory costs Owners continued hold the line

on compensation, with 10 percent reporting reduced worker compensation and 13 percent reporting gains Seasonally adjusted, a net two percent reported raising worker compensation, only four points better than

February’s record low reading of negative two percent However, labor costs still appear to be under control, one of the major factors affecting inflation pressures In past recovery periods, compensation improved at a much faster pace than we have experienced in this recovery period

CREDIT MARKETS

Regular NFIB borrowers, 32 percent accessing capital markets at least once a quarter, one point above the survey record low, continued to report difficulties in arranging credit A net 13 percent reported loans harder to get than in their last attempt, down one point from April Overall, ninety- two percent of the owners reported all their credit needs met, or they did not want to borrow Very weak plans to make capital expenditures, to add

to inventory and to expand operations make it clear that many good

borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory and take out the usual loans used to support these activities Even if credit were free, these business owners would not spend the money to hire or make capital outlays since such expenditures have no prospect of earning their keep Only three percent of the owners reported “finance” as their top business problem, down one point Pre-1983, as many as 37 percent cited financing and interest rates as their top problem What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities Thirty (30) percent cite weak sales as their top business problem,

up one point from April

The small business sector (half of private GDP and 2/3rds of new job

created historically) is showing some signs of new life The May survey

delivered some actual positives – more owners gave positive responses

than negative ones to many questions than at any time in the past two

years Still, overall, the Index and its components remain in “recession”

territory The small business sector is in maintenance mode, not growth,

but it has definitely lifted off the bottom with the worst survey readings

behind us

Unfortunately, Washington, D.C and many state legislatures seem

determined to undermine any economic forward momentum for small

business owners And even though small business owners continue to plead

their case for policies that will help foster economic growth, many

lawmakers are unwilling to listen Small business owners keep saying that

poor sales (“It’s the consumer, stupid!”) is their most pressing problem and

the reasons they aren’t interested in expanding are due to current economic

conditions and the political climate Unfortunately, Congress is fixated on

credit and special favors for unionized firms, and that wont sustain or

support faster growth

A huge help in moving toward a stronger economy for small business

owners would be to “do no harm” But Congress continues to pass and

propose legislation that increases the cost of running a business and create

huge uncertainty about future costs The small business sector of the

economy is improving, there is a pulse, but it is weak Washington is

applying leeches and performing blood-letting as a cure Assuming

Washington does not intensify its efforts to “cure” small business, the

sector will continue to plod forward as consumer spending picks up and the

housing mess continues to correct itself With half of the growth in Q1

accounted for by inventories, it is clear how important housing and

consumer spending usually are in a recovery These engines must get

started, the inventory surge can’t last much longer

For the year (half of it is almost over!), inflation will remain low as owners

continue to reduce prices to raise cash and shed inventory to stay in

business The Fed has committed to lower interest rates, for better or

worse, so no problems with the cost of credit (assuming one has use for it)

Job growth will be anemic, we lose 400,000 Census workers mid-year and,

if we want to restore 2007 employment levels and unemployment rates by

2013, we need a net 400,000 new jobs every month for 3 years The

inventory cycle is almost done for small businesses as existing stocks come

into line with desired levels (based on rather pessimistic expectations for

sales growth, unfortunately) Capital spending wont pick up, there is still

excess capacity so spending will occur only for necessary repairs and

replacement for most owners Lot’s of small businesses in the 5 Gulf

states will be harmed by the oil debacle, more “weak sales” Let’s hope

for a successful resolution of that problem before the next survey

(Seasonally Adjusted 1986=100)

OUTLOOK Good Time to Expand and Expected General Business Conditions

January 1986 to May 2010 (Seasonally Adjusted)

SMALL BUSINESS OUTLOOK

80 90 100

86 88 90 92 94 96 98 00 02 04 06 08 10

-40 -20 0 20 40 60 80

SMALL BUSINESS OUTLOOK (CONTINUED)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MOST IMPORTANT REASON FOR EXPANSION OUTLOOK

Reason Percent by Expansion Outlook

OUTLOOK FOR GENERAL BUSINESS CONDITIONS

Net Percent (“Better” Minus “Worse”) Six Months From Now

January 1986 to May 2010 (Seasonally Adjusted)

ACTUAL EARNINGS CHANGES Net Percent (“Higher” Minus “Lower”) Last Three Months

Compared to Prior Three Months

(Seasonally Adjusted)

MOST IMPORTANT REASON FOR LOWER EARNINGS

Percent Reason May 2010

Reason Current Month One Year Ago Two Years Ago

Usual Seasonal Change 5 5 8

January 1986 to May 2010 (Seasonally Adjusted)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

(Seasonally Adjusted)

ACTUAL PRICE CHANGES Net Percent (“Higher” Minus “Lower”) Compared to Three Months Ago

(Seasonally Adjusted)

PRICES Actual Last Three Months and Planned Next Three Months

January 1986 to May 2010 (Seasonally Adjusted)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

SMALL BUSINESS EMPLOYMENT

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

QUALIFIED APPLICANTS FOR JOB OPENINGS

Percent Few or No Qualified Applicants

(Seasonally Adjusted)

EMPLOYMENT Planned Next Three Months and Current Job Openings

January 1986 to May 2010 (Seasonally Adjusted)

YEAR

SMALL BUSINESS EMPLOYMENT (CONTINUED)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

(Seasonally Adjusted)

HIRING PLANS Net Percent (“Increase” Minus “Decrease”) in the Next Three Months

January 1986 to May 2010 (Seasonally Adjusted)

SMALL BUSINESS COMPENSATION (CONTINUED)

ACTUAL COMPENSATION CHANGES Net Percent (“Increase” Minus “Decrease”) During Last Three Months

YEAR

January 1986 to May 2010

* For the population borrowing at least once every three months.

REGULAR BORROWERS Percent Borrowing at Least Once Every Three Months

SMALL BUSINESS CREDIT CONDITIONS (CONTINUED)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec