William C. Dunkelberg Holly Wade SMALL BUSINESS OPTIMISM INDEX COMPONENTS

Transcription

1 NFIB Small Business Economic Trends William C. Dunkelberg Holly Wade May 9 Based on a Survey of Small and Independent Business Owners SMALL BUSINESS OPTIMISM INDEX COMPONENTS Seasonally Change From Contribution Index Component Adjusted Level Last Month Index Change Plans to Increase Employment -5% 5 8% Plans to Make Capital Outlays 19% 3 5% Plans to Increase Inventories -7% 6 9% Expect Economy to Improve 2% 24 38% Expect Real Sales Higher -11% 31% Current Inventory -7% 6 9% Current Job Openings 9% -1-2% Expected Credit Conditions -12% 2 3% Now a Good Time to Expand 4% 3 5% Earnings Trends -43% 3 5% Total Change 64 % Column 1is 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 The 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 Policy Analyst Holly Wade are responsible for the report. In Th i s Issue Summary...1 Commentary....3 Optimism Outlook...4 Earnings...6 Sales...7 Prices...8 Employment....9 Compensation... Credit Conditions Inventories...14 Capital Outlays Most Important Problem...18 Survey Profile...19 Economic Survey....

3 SUMMARY OPTIMISM INDEX The Index of Small Business Optimism rebounded 5.8 points in April to 86.8 (1986=), led higher by 8 of the Index components. All three of the hard components (job creation plans, inventory investment plans and capital spending plans) rose, although they are still at anemic levels. Assuming April s numbers are not merely a brief interruption of a longer recession, this is good news for Gross Domestic Product growth and a rescue of the job market. LABOR MARKETS Seasonally adjusted, there was a decline in average employment per firm for the first quarter by small business owners in April. Nine percent (seasonally adjusted) reported unfilled job openings, down a point from March, relatively stable for the past few months and historically low. Over the next three months, percent plan to reduce employment (down two points), and 13 percent plan to create new jobs (up one point), yielding a seasonally adjusted net negative 5 percent of owners planning to create new jobs, a five point improvement. It appears that owners are not through with their labor-based cost cutting, but it is slowing. In addition to reducing employment, owners are reducing compensation. A record high 11 percent reported reducing worker compensation and a near-record low 12 percent reported raising worker compensation, helping to keep the lid on labor costs. CAPITAL SPENDING The frequency of reported capital outlays over the past six months fell four points to 46 percent of all firms, points lower than year ago levels. Owners continue to defer any project not essential to the survival of the firm (and consequently loan demand is lower). Overall, the performance was dismal. But, the longer owners postpone investment, the larger the pool of pent up demand for new equipment and improvements and expansion of facilities that will eventually re-start the economy. Plans to make capital expenditures over the next few months rose three points to 19 percent, historically very low, but headed up for a change. INVENTORIES AND SALES Small business owners continued to liquidate inventories. A net negative 27 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), four points lower than March and a new record low. Inventories are being reduced at a record pace. For all firms, a net negative five percent (a one point deterioration) reported stocks too low. But the net percent of all owners (seasonally adjusted) reporting higher sales in the past three months gained six points, rising to a net negative 28 percent, still in the tank but headed up, not down This survey was conducted in April 9. A sample of,799 small business owners/members was drawn. Two thousand thirteen (1794) usable responses were received a response rate of 17 percent. 1 NFIB Small Business Economic Trends Quarterly Report

4 SUMMARY INFLATION In April, 12 percent of small business owners reported raising their average selling prices (down one point), while 34 percent reported reductions in average selling prices. Seasonally adjusted, the net percent of owners raising prices was negative 24 percent, far more cutting prices than raising them. That translates into disinflation. But, prices probably cannot continue to be reduced, unless the firm goes out of business. The percent of owners citing inflation as their number one problem (e.g. costs coming in the back door of the business) fell two points to four percent. The average percent of owners citing inflation as their #1 problem since the monthly surveys were started in 1986 is 3 percent. More firms reported cutting average selling prices than raising them in all industries. PROFITS AND WAGES Reports of positive profit trends improved three points to a net negative 43 percentage points, not much to cheer about, but at least headed toward improvement. Pricing power has vanished and reports of sales declines are at record high levels because of reduced demand and widespread price cuts. Wage pressures are falling as owners not only reduce employment, but also the compensation of remaining workers. Seasonally adjusted, a net 5 percent reported raising compensation, one point better than the record low from March. Poor sales and price cuts are responsible for much of the weakness in profits. Rising labor costs are not an issue. 2 NFIB Small Business Economic Trends Quarterly Report CREDIT MARKETS As the economy weakened, loan demand faded as fewer capital projects were undertaken and inventory investment fell as stocks were liquidated. Thirty-three (33) percent reported regular borrowing, typical of the past years. Because of the slowdown in the economy, the credit worthiness of many potential borrowers has deteriorated over the last year, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards), but there is no rush to borrow money like that observed in the pre-1983 period. Thirty () percent reported all their borrowing needs met (up one point) compared to 8 percent who reported problems obtaining desired financing (down two points). The net percent reporting all borrowing needs satisfied rose three points to 22 percent. This data series has only covered the 1 recession period, making historical comparisons more difficult, but it does appear that difficulties in arranging needed financing have become more frequent in 9. So, it appears that as the recession drags on, financing becomes more difficult to arrange (profits do not improve, loan payments harder to make on time etc.). The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 12 percent (more owners expect that it will be harder to arrange financing), two points better than the March reading. Owners do not see credit conditions easing in spite of the Federal Reserve s hugely expansionary policies.

5 COMMENTARY Most commentators compare our current situation to our experience in the period. There are similarities in the behavior of owner optimism, although the problems facing the economy were quite different (15 percent inflation, 21 percent prime rate, 17 percent mortgage rates, percent unemployment rate). The Optimism Index peaked in 1976:2 at 3.2 and fell to the record low reading of 8.1 in 198:2. This was a decline of 23 points in 16 quarters. Optimism peaked in the current expansion at 5.8 in 4:3 (although virtually identical readings occurred in the prior two quarters) and fell 22 points to 84.1 in January this year. Both declines were about percent in magnitude and over roughly the same period of time. In 13 quarters, the Index rebounded 28 points to 7.7 in 1983:3, signaling the start of the 198s expansion. The April Index reading rebounded 5.8 points from March and is up 2.7 points from January. Perhaps this is the beginning of the end of the recession. The 6.1 percent decline reported for GDP in the first quarter had some good news. Almost half was due to reductions in inventory to meet an unexpectedly solid increase of 2.2 percent in consumer spending. This means that inventory left store shelves at a faster rate, increasing the urgency to replace inventory in future periods. The NFIB data indicate inventory reductions are widespread, with an unprecedented 13 quarters during which double digit percentages of owners reported reducing stocks. Indeed, should spending recover at a faster pace than most expect, prices may come under pressure on the up side. The gap between desired and actual inventories could be huge if sales rebound solidly. Overall, pent up demand is building rapidly in the economy. Capital spending and inventory investment are at record low levels as are plans to increase spending. The reduction in employment is unprecedented in survey history and likely overdone. Prices have been cut to reduce inventory, but cut to unsustainably low levels. Car sales, usually around 15 million annually cannot stay at 9 million. New housing units are being constructed at a third the rate normally needed. Population growth and household formation continue apace and all the new households are not all going to live in Florida and California where excess house supply is huge. Trillions of dollars sit on the sidelines in money market funds earning virtually nothing. The dykes are starting to leak, a flood is a significant upside risk. In the long run, consumers spend a fairly steady share of their income. The rapid growth in paper wealth and easy credit allowed them to get ahead of themselves, but they are starting to even things out and this will support gains in spending as the economy recovers. The uncertainty now lies with government policies. Just how much of a headwind will new regulations, nationalization, higher taxes, spending that diverts private resources to public use and a stunning level of borrowing that could crowd out private investment pose for the economy? Can the Federal Reserve reclaim the liquidity it has created before inflation sets in? Time and politics will tell. 3 NFIB Small Business Economic Trends Quarterly Report

6 OVERVIEW - SMALL BUSINESS OPTIMISM OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=) 1 Index Value (1986=) OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=) SMALL BUSINESS OUTLOOK OUTLOOK 4 NFIB Small Business Economic Trends Quarterly Report Percent "Good Time to Expand" (thick line) Good Time to Expand and Expected General Business Conditions January Quarter 1974 to April Quarter 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 April 9 Reason Good Time Not Good Time Uncertain Economic Conditions Sales Prospects Fin. & Interest Rates Cost of Expansion Political Climate 8 3 Other/Not Available 1 1 OUTLOOK FOR GENERAL BUSINESS CONDITIONS Net Percent ( Better Minus Worse ) Six Months From Now NFIB Small Business Economic Trends Quarterly Report

8 SMALL BUSINESS EARNINGS EARNINGS Actual Last Three Months January Quarter 1974 to April Quarter 9 - Net Percent ACTUAL EARNINGS CHANGES Net Percent ( Higher Minus Lower ) Last Three Months Compared to Prior Three Months NFIB Small Business Economic Trends Quarterly Report MOST IMPORTANT REASON FOR LOWER EARNINGS Percent Reason April 9 Reason 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 SALES Actual (Prior Three Months) and Expected (Subsequent Three Months) January 1986 to April 9 Net Percent 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 Quarterly Report

10 SMALL BUSINESS PRICES PRICES Actual Last Three Months and Planned Next Three Months January Quarter 1974 to April 9 Net Percent 7 6 Actual 5 4 Planned ACTUAL PRICE CHANGES Net Percent ( Higher Minus Lower ) Compared to Three Months Ago NFIB Small Business Economic Trends Quarterly 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 4 EMPLOYMENT Planned Next Three Months and Current Job Openings January Quarter 1974 to April Quarter 9 Planned Job Openings NFIB Small Business Economic Trends Quarterly 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 Quarterly Report Net Percent SMALL BUSINESS COMPENSATION COMPENSATION Actual Last Three Months and Planned Next Three Months January 1986 to April Planned Higher 5 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 (Thick Line) PRICES AND LABOR COMPENSATION Net Percent Price Increase and Net Percent Compensation Increase Labor Compensation (Thin Line) 11 NFIB Small Business Economic Trends Quarterly Report

14 SMALL BUSINESS CREDIT CONDITIONS Net Percent CREDIT CONDITIONS Loan Availability Compared to Three Months Ago* January 1974 to April * 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 Quarterly 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 (Borrowers Only) 4 36/6 36/8 38/6 37/6 34/5 34/5 37/5 35/7 36/5 35/5 36/3 39/4 5 38/4 39/4 39/5 38/6 41/4 39/5 34/5 36/4 34/4 34/5 39/4 35/5 6 36/4 37/6 36/6 38/5 38/5 39/5 38/4 44/4 34/4 36/7 34/4 36/5 7 36/5 4/5 35/5 38/4 39/6 36/4 37/5 35/4 37/5 36/6 32/4 32/7 8 34/5 35/4 32/6 34/5 34/7 35/5 32/7 35/6 33/6 31/6 31/7 32/6 9 33/8 32/8 29/ /8 EXPECTED CREDIT CONDITIONS Net Percent ( Easier Minus Harder ) During Next Three Months (Regular Borrowers) Relative (thick line) INTEREST RATES Relative Rates and Actual Rates Last Three Months January Quarter 1974 to April Quarter Actual (thin line) 13 NFIB Small Business Economic Trends Quarterly 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 Quarterly Report Net Percent SMALL BUSINESS INVENTORIES INVENTORIES Actual (Last Three Months) and Planned (Next Three Months) January Quarter 1974 to April Quarter Actual -25 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 Quarterly Report

18 SMALL BUSINESS CAPITAL OUTLAYS 15 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 5 Percent -5 - Satisfaction Plans CAPITAL EXPENDITURES Actual Last Six Months and Planned Next Three Months January Quarter 1974 to April Quarter 9 6 Percent 4 Actual Plans NFIB Small Business Economic Trends Quarterly 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, $, to $49, $5, to $99, $, No Answer 2 CAPITAL EXPENDITURE PLANS Percent Planning a Capital Expenditure During Next Three to Six Months NFIB Small Business Economic Trends Quarterly Report

20 SINGLE MOST IMPORTANT PROBLEM SINGLE MOST IMPORTANT PROBLEM April 9 Problem 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 SELECTED SINGLE MOST IMPORTANT PROBLEM Insurance, Big Business Competition, Inflation, and Regulation January Quarter 1974 to April Quarter 9 Big Business Inflation Insurance Regulation Percent of Firms NFIB Small Business Economic Trends Quarterly Report Percent of Firms 4 SELECTED SINGLE MOST IMPORTANT PROBLEM Sales, Fin. & Interest Rates, Labor Cost, Labor Quality, and Taxes January Quarter 1974 to April Quarter 9 Taxes Interest Rates 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 15 5 Agriculture Retail Wholesale Transportation Manufacturing Construction Professional Services Financial Percent One NFIB OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY Two Number of Full and Part-Time Employees Three - Five Six - Nine Ten - Fourteen Fifteen - Nineteen Twenty - Thirty-Nine Forty Or More No Reply 19 NFIB Small Business Economic Trends Quarterly 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 Quarterly 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?... 19