NFIB SMALL BUSINESS. William C. Dunkelberg Holly Wad SMALL BUSINESS OPTIMISM INDEX COMPONENTS. Seasonally Adjusted Level

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1 NFIB SMALL BUSINESS ECONOMIC TRENDS William C. Dunkelberg Holly Wad April 212 Based on a Survey of Small and Independent Business Owners SMALL BUSINESS OPTIMISM INDEX COMPONENTS Index Component Seasonally Adjusted Level Change from Last Month Contribution to Index Change Plans to Increase Employment % - 4 * Plans to Make Capital Outlays 22% -1 * Plans to Increase Inventories % - 2 * Expect Economy to Improve -8% - 2 * Expect Real Sales Higher 8% - 4 * Current Inventory 3% 1 * Current Job Openings 15% - 2 * Expected Credit Conditions -11% - 1 * Now a Good Time to Expand 7% - 1 * Earnings Trends -23% - 4 * Total Change - 2 * (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)

2 NFIB SMALL BUSINESS ECONOMIC TRENDS NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since The sample is drawn from the membership files of the National Federation of Independent Business (NFIB). Each was mailed a questionnaire and one reminder. Subscriptions for twelve monthly SBET issues are $25. 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 publication name and date and note it is a copyright of the NFIB Research Foundation. NFIB Research Foundation. ISBS # Chief Economist William C. Dunkelberg and Senior Policy Analyst Holly Wade are responsible for the report. IN THIS ISSUE Summary Commentary Optimism Outlook Earnings Sales Prices Employment Compensation Credit Conditions Inventories Capital Outlays Most Important Problem Survey Profile Economic Survey

3 SUMMARY OPTIMISM INDEX Six monthly gains in the Index of Small Business Optimism were reversed in March, as the index fell almost 2 points to Nine of the ten Index components declined, only increasing satisfaction with inventory stocks added one point to the Index computation. It looks like a replay of 211, a few months look good early on and then it all fades. LABOR MARKETS The percent of owners reporting hard to fill job openings fell 2 points to 15 percent, the second monthly decline since reaching 18 percent in January, the highest reading since June 28. Hard-to-fill job openings are a strong predictor of the unemployment rate and indicate that the rate is likely to rise, other things equal. This is reinforced by a four month decline in the net percent of owners planning to create new jobs. March s net reading was 4 points lower than February and 7 points lower than last November. With a net percent planning to create new jobs, it is hard to be optimistic about job growth. CAPITAL SPENDING The frequency of reported capital outlays over the past six months fell 5 points to 52 percent, a reversal of the gains posted in January and February. The record low of 44 percent was reached most recently in August 21. Twenty-two (22) percent report poor sales as their top business problem, unchanged from February. With an outlook like this, fewer owners will bet their hard earned capital on the future. It is too uncertain. The percent of owners planning capital outlays in the next three to six months fell one point to 22 percent. Seven percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point. The net percent of owners expecting better business conditions in six months was a negative 8 percent (down 2 points). INVENTORIES AND SALES The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months gained a surprising 8 points, rising to a net 1 percent. This is the best reading since December 27, the peak of the last expansion. The net percent of owners expecting higher real sales lost 4 points, falling to a net 8 percent of all owners (seasonally adjusted). A net negative 9 percent of all owners reported growth in inventories (seasonally adjusted), 9 points worse than February. For all firms, a net 3 percent (up 1 point) reported stocks too low, one of the most positive reports in 37 years. Overall, it appears that small business owners have reduced inventories to acceptable levels given the outlook for sales growth. Without improved sales, there is little motivation to order new inventory. Plans to add to inventories fell 2 points to a net percent of all firms (seasonally adjusted). This survey was conducted in March 212. A sample of 3,938 small-business owners/members was drawn. Eight hundred nineteen (757) usable responses were received a response rate of 19 percent. 1 NFIB Small Business Economic Trends Monthly Report

4 INFLATION Twenty-five percent of the NFIB owners reported raising their average selling prices in the past three months (up 5 points) and 17 percent reported price reductions (up 1 point). Seasonally adjusted, the net percent raising selling prices was 6 percent, up 5 points from February. The Federal Reserve is counting on low inflation to bolster its position that current policy is appropriate for the next year or two. Overall, price hikes were quite pervasive as owners respond to rising input costs (labor and materials) and try to pass those costs on to customers. Twenty-six (26) percent plan on raising average prices in the next few months, 4 percent plan reductions. Seasonally adjusted, a net 21 percent plan price hikes, up 2 points. Price cutting appears to be fading and this will put upward pressure on the inflation measures. EARNINGS AND WAGES Reports of positive earnings trends lost 4 points in March, falling to a net negative 23 percent. Not seasonally adjusted, 14 percent reported profits higher (down 2 points), and 43 percent reported profits falling (up 4 points). Profits are the source of capital to grow small firms since they can t sell shares to shareholders to provide new capital, so this decline in profit trends is not a welcome development. Six percent reported reduced worker compensation and 2 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation, the highest reading in 39 months. A net seasonally adjusted 9 percent plan to raise compensation in the coming months, a 3 point decline from February. 2 NFIB Small Business Economic Trends Monthly Report CREDIT MARKETS Financing remained low on the list of concerns for business owners. Only 3 percent cited financing as their top business problem, compared to 2 percent citing taxes, 19 percent unreasonable regulation and red tape and 22 percent citing weak sales. Ninety-two (92) percent reported that all their credit needs were met or that they were not interested in borrowing. Twenty-seven (27) percent reported all credit needs met, eight percent reported that not all of their credit needs were satisfied and 52 percent said they did not want a loan. Thirty-one (31) percent of all owners reported borrowing on a regular basis, down one point from February. A net 11 percent reported loans harder to get compared to their last attempt (asked of regular borrowers only), up 3 points, surprisingly. The average rate paid on short maturity loans was 5.7 percent, stuck at much the same level for years. Rates paid by small business owners are not responding to the Federal Reserve s efforts to lower them. Three percent of owners reported higher interest rates on their most recent loan, and 3 percent reported getting a lower rate, so overall interest costs are stable. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 11 percent (more owners expect that it will be harder to arrange financing than easier), one point worse than February.

5 COMMENTARY The March survey results were bad news, ending what promised to be steady, albeit glacially slow, improvements in the small business sector of the economy. Nothing much happened in March to make owners more optimistic about the future and that seems to be a problem, the status quo. Europe was quiet but somber, uneasy, as if waiting for another shoe to drop. Consumer confidence and spending remains depressed. And health care is in the Supreme Court creating more uncertainty, either way the decision goes. Inflation pressures are building and reports of rising worker compensation are the highest since 28. The percent of owners reporting inflation (rising costs for inputs) as the #1 business problem are the second most frequent since 28, the highest since 28 occurred a few months earlier in 211. Reports of increases in average selling prices are rising and net 21 percent of the owners plan to raise their selling prices in the coming months. The March employment numbers were a bit of a surprise and a disappointment. On the establishment survey, one might hypothesize that we hired in January and February a lot of the workers we would have hired in March as the weather improved. This means that we added seasonal adjustments to January and February numbers that were not as low as they usually would be with bad winter weather. So, they looked good. Then March hiring was low because a substantial share of it was done in the prior two months, and the seasonal adjustment couldn t overcome the advance hiring. In short, the current employment stats are not seasonally typical so the seasonal adjustments mislead us. The pattern of losses in retailing is a puzzle, especially since retail sales growth has been positive, confirmed by the rise in the net percent of owners reporting improving sales trends. This raises a second inconsistency, if employment is doing so well, where is the Gross Domestic Product (GDP) that they are producing? Construction and manufacturing employment are behaving as expected. We make more GDP today than at the peak of the expansion in dollar terms, but there are a million housing starts missing in GDP, replaced by manufacturing output (lots of that being exported). Thus, we are using seven million fewer workers since construction is labor intensive and manufacturing is not. The NFIB models based on the percent of owners reporting poor sales as their top business and on the percent with hard-to-fill job openings and job creation plans have tracked the unemployment rate quite well. If March data were to be the same as the April survey, the forecast would add half a point to the unemployment rate for Q2. The Federal Reserve has become more active in the media, trying to be more transparent about policy but adding little clarity. The basic message is that rates will remain low as long as the economy is weak but no one knows at what point the economy will be deemed strong again by policymakers creating more uncertainty. 3 NFIB Small Business Economic Trends Monthly Report

6 OVERVIEW - SMALL BUSINESS OPTIMISM OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=1) 11 Index Value (1986=1) OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=1) SMALL BUSINESS OUTLOOK 4 NFIB Small Business Economic Trends Monthly Report Percent "Good Time to Expand" (thick line) OUTLOOK Good Time to Expand and Expected General Business Conditions January 1986 to March Percent "Better" Minus "Worse" Expected General Business Conditions (thin line)

7 SMALL BUSINESS OUTLOOK (CONTINUED) OUTLOOK FOR EXPANSION Percent Next Three Months Good Time to Expand MOST IMPORTANT REASON FOR EXPANSION OUTLOOK Reason Percent by Expansion Outlook March 212 Reason Good Time Not Good Time Uncertain Economic Conditions Sales Prospects Fin. & Interest Rates Cost of Expansion 3 1 Political Climate Other/Not Available OUTLOOK FOR GENERAL BUSINESS CONDITIONS Net Percent ( Better Minus Worse ) Six Months From Now NFIB Small Business Economic Trends Monthly Report

8 SMALL BUSINESS EARNINGS EARNINGS Actual Last Three Months January 1986 to March Net Percent ACTUAL EARNINGS CHANGES Net Percent ( Higher Minus Lower ) Last Three Months Compared to Prior Three Months NFIB Small Business Economic Trends Monthly Report MOST IMPORTANT REASON FOR LOWER EARNINGS Percent Reason March 212 Current Month One Year Ago Two Years Ago Sales Volume Increased Costs* Cut Selling Prices Usual Seasonal Change Other * Increased costs include labor, materials, finance, taxes, and regulatory costs.

9 SMALL BUSINESS SALES Net Percent SALES Actual (Prior Three Months) and Expected (Next Three Months) January 1986 to March Expected Actual ACTUAL SALES CHANGES Net Percent ( Higher Minus Lower ) Last Three Months Compared to Prior Three Months SALES EXPECTATIONS Net Percent ( Higher Minus Lower ) During Next Three Months NFIB Small Business Economic Trends Monthly Report

10 SMALL BUSINESS PRICES PRICES Actual Last Three Months and Planned Next Three Months January 1986 to March Net Percent of Firms Planned -2 Actual ACTUAL PRICE CHANGES Net Percent ( Higher Minus Lower ) Compared to Three Months Ago NFIB Small Business Economic Trends Monthly Report PRICE PLANS Net Percent ( Higher Minus Lower ) in the Next Three Months

11 SMALL BUSINESS EMPLOYMENT ACTUAL EMPLOYMENT CHANGES Net Percent ( Increase Minus Decrease ) in the Last Three Months QUALIFIED APPLICANTS FOR JOB OPENINGS Percent Few or No Qualified Applicants * * Percent EMPLOYMENT Planned Next Three Months and Current Job Openings January 1986 to March 212 Planned Job Openings NFIB Small Business Economic Trends Monthly Report

12 SMALL BUSINESS EMPLOYMENT (CONTINUED) JOB OPENINGS Percent With Positions Not Able to Fill Right Now HIRING PLANS Net Percent ( Increase Minus Decrease ) in the Next Three Months NFIB Small Business Economic Trends Monthly Report Net Percent SMALL BUSINESS COMPENSATION COMPENSATION Actual Last Three Months and Planned Next Three Months January 1986 to March 212 Planned Higher Actual Higher

13 SMALL BUSINESS COMPENSATION (CONTINUED) ACTUAL COMPENSATION CHANGES Net Percent ( Increase Minus Decrease ) During Last Three Months COMPENSATION PLANS Net Percent ( Increase Minus Decrease ) in the Next Three Months PRICES AND LABOR COMPENSATION Net Percent Price Increase and Net Percent Compensation Actual Prices Actual Compensation NFIB Small Business Economic Trends Monthly Report

14 SMALL BUSINESS CREDIT CONDITIONS Net Percent of Firms CREDIT CONDITIONS Loan Availability Compared to Three Months Ago* January 1986 to March * For the population borrowing at least once every three months. REGULAR BORROWERS Percent Borrowing at Least Once Every Three Months NFIB Small Business Economic Trends Monthly Report AVAILABILITY OF LOANS Net Percent ( Easier Minus Harder ) Compared to Three Months Ago (Regular Borrowers)

15 SMALL BUSINESS CREDIT CONDITIONS (CONTINUED) BORROWING NEEDS SATISFIED Percent of All Businesses Last Three Months Satisfied/ Percent of All Businesses Last Three Months Not Satisfied (All Borrowers) 27 36/5 4/5 35/5 38/4 39/6 36/4 37/5 35/4 37/5 36/6 32/4 32/ /5 35/4 32/6 34/5 34/7 35/5 32/7 35/6 33/6 31/6 31/7 32/ /8 32/8 29/1 3/8 28/9 3/1 28/1 3/7 3/1 29/9 29/1 28/ /11 29/9 29/11 28/9 28/8 25/1 27/9 27/9 27/9 26/9 25/9 28/ /8 29/8 28/7 28/8 28/8 25/9 28/8 28/7 29/8 28/9 3/7 29/ /7 31/7 27/8 EXPECTED CREDIT CONDITIONS Net Percent ( Easier Minus Harder ) During Next Three Months (Regular Borrowers) Avg. Short-term Rate (thick line) INTEREST RATES Relative Rates and Actual Rates Last Three Months January 1986 to March Rate Relative (thin line) 13 NFIB Small Business Economic Trends Monthly Report

16 SMALL BUSINESS CREDIT CONDITIONS (CONTINUED) RELATIVE INTEREST RATE PAID BY REGULAR BORROWERS Net Percent ( Higher Minus Lower ) Compared to Three Months Ago Borrowing at Least Once Every Three Months. ACTUAL INTEREST RATE PAID ON SHORT-TERM LOANS BY BORROWERS Average Interest Rate Paid NFIB Small Business Economic Trends Monthly Report Net Percent SMALL BUSINESS INVENTORIES INVENTORIES Actual (Last Three Months) and Planned (Next Three Months) January 1986 to March 212 Actual Planned

17 SMALL BUSINESS INVENTORIES (CONTINUED) ACTUAL INVENTORY CHANGES Net Percent ( Increase Minus Decrease ) During Last Three Months INVENTORY SATISFACTION Net Percent ( Too Low Minus Too Large ) at Present Time INVENTORY PLANS Net Percent ( Increase Minus Decrease ) in the Next Three to Six Months NFIB Small Business Economic Trends Monthly Report

18 SMALL BUSINESS CAPITAL OUTLAYS INVENTORY SATISFACTION AND INVENTORY PLANS Net Percent ( Too Low Minus Too Large ) at Present Time Net Percent Planning to Add Inventories in the Next Three to Six Months Percent -5-1 Inventory Plans Inventory Satisfaction CAPITAL EXPENDITURES Actual Last Six Months and Planned Next Three Months January 1986 to March 212 Percent Actual Planned NFIB Small Business Economic Trends Monthly Report ACTUAL CAPITAL EXPENDITURES Percent Making a Capital Expenditure During the Last Six Months

19 SMALL BUSINESS CAPITAL OUTLAYS (CONTINUED) TYPE OF CAPITAL EXPENDITURES MADE Percent Purchasing or Leasing During Last Six Months Type Current One Year Ago Two Years Ago Vehicles Equipment Furniture or Fixtures Add. Bldgs. or Land Improved Bldgs. or Land AMOUNT OF CAPITAL EXPENDITURES MADE Percent Distribution of Per Firm Expenditures During the Last Six Months Amount Current One Year Ago Two Years Ago $1 to $ $1, to $4, $5, to $9, $1, to $49, $5, to $99, $1, No Answer CAPITAL EXPENDITURE PLANS Percent Planning a Capital Expenditure During Next Three to Six Months NFIB Small Business Economic Trends Monthly Report

20 SINGLE MOST IMPORTANT PROBLEM Problem SINGLE MOST IMPORTANT PROBLEM March 212 Current One Year Ago Survey High Survey Low Taxes Inflation Poor Sales Fin. & Interest Rates Cost of Labor Govt. Reqs. & Red Tape Comp. From Large Bus Quality of Labor Cost/Avail. of Insurance Other Percent of Firms SELECTED SINGLE MOST IMPORTANT PROBLEM Inflation, Big Business, Insurance and Regulation January 1986 to March 212 Big Business Inflation Insurance Regulation NFIB Small Business Economic Trends Monthly Report Percent of Firms SELECTED SINGLE MOST IMPORTANT PROBLEM Taxes, Interest Rates, Sales and Labor Quality January 1986 to March 212 Taxes Interest Rates & Finance Sales Labor Quality

21 SURVEY PROFILE OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY NFIB Actual Number of Firms NFIB OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY Industry of Small Business Percent Percent NFIB OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY Number of Full and Part-Time Employees 19 NFIB Small Business Economic Trends Monthly Report

22 NFIB RESEARCH FOUNDATION SMALL BUSINESS ECONOMIC SURVEY SMALL BUSINESS SURVEY QUESTIONS PAGE IN REPORT Do you think the next three months will be a good time for small business to expand substantially? Why? About the economy in general, do you think that six months from now general business conditions will be better than they are now, about the same, or worse? Were your net earnings or income (after taxes) from your business during the last calendar quarter higher, lower, or about the same as they were for the quarter before? If higher or lower, what is the most important reason? During the last calendar quarter, was your dollar sales volume higher, lower, or about the same as it was for the quarter before? Overall, what do you expect to happen to real volume (number of units) of goods and/or services that you will sell during the next three months? How are your average selling prices compared to three months ago? In the next three months, do you plan to change the average selling prices of your goods and/or services? During the last three months, did the total number of employees in your firm increase, decrease, or stay about the same? NFIB Small Business Economic Trends Monthly Report If you have filled or attempted to fill any job openings in the past three months, how many qualified applicants were there for the position(s)? Do you have any job openings that you are not able to fill right now? In the next three months, do you expect to increase or decrease the total number of people working for you? Over the past three months, did you change the average employee compensation? Do you plan to change average employee compensation during the next three months?

23 SMALL BUSINESS SURVEY QUESTIONS PAGE IN REPORT Are loans easier or harder to get than they were three months ago? During the last three months, was your firm able to satisfy its borrowing needs? Do you expect to find it easier or harder to obtain your required financing during the next three months? 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? 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? During the last three months, did you increase or decrease your inventories? At the present time, do you feel your inventories are too large, about right, or inadequate? 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? During the last six months, has your firm made any capital expenditures to improve or purchase equipment, buildings, or land? If [your firm made any capital expenditures], what was the total cost of all these projects? Looking ahead to the next three to six months, do you expect to make any capital expenditures for plant and/or physical equipment? What is the single most important problem facing your business today? Please classify your major business activity, using one of the categories of example below How many employees do you have full and part-time, including yourself? NFIB Small Business Economic Trends Monthly Report