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 13 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 % % Plans to Make Capital Outlays 25% % Plans to Increase Inventories - 5% % Expect Economy to Improve - 28% % Expect Real Sales Higher - 4% % Current Inventory -1% % Current Job Openings 18% % Expected Credit Conditions - 6% 2-14% Now a Good Time to Expand 4% - 1 7% Earnings Trend - 23% 3-21% Total Change - 14 % (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 After three months of sustained growth, the March NFIB Index of Small Business Optimism ended its slow climb, declining 1.3 points and landing at In the 44 months of economic expansion since the beginning of the recovery in July 9, the Index has averaged 9.7, putting the March reading below the mean for this period. Of the ten Index components, two increased, two were unchanged and six declined. Among the greatest declines were labor market indicators, inventory investment plans and sales expectations. LABOR MARKETS Job creation in the small-business sector was perhaps the only bright spot in the March report. The fourth consecutive month of positive job growth, owners reported increasing employment an average of.19 workers per firm in the month of March. This is the best reading NFIB has recorded in a year. For the 47 percent of owners who hired or tried to hire in the last three months, 36 percent (77 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Owners are still pessimistic and see little reason to hire. Eighteen (18) percent of all owners reported job openings they could not fill in the current period, down 3 points from February. This measure is highly correlated (inversely) with the unemployment rate, so it is suggestive of a minor increase in the percent of our labor force that is unemployed. Much will depend on labor force participation changes of course. Job creation plans fell 4 points to a net percent planning to increase total employment, a disappointing outcome. INVENTORIES AND SALES The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was negative 7 percent, an improvement of 2 points and the best reading in eight months. However, firms are still reporting more declines than gains. Such a negative outlook will not stimulate a lot of hiring or spending or inventory investment. The net percent of owners expecting higher real sales volumes fell 5 points to a negative 4 percent of all owners (seasonally adjusted), 16 points below the 12 cycle high of a net 12 percent reached in February 12. Seventeen (17) percent of small employers cite weak sales as their top business problem, a one point improvement over February. For all firms, a net negative one percent (down 2 points) reported stocks too low, historically a good level of satisfaction with inventory stocks. The pace of inventory reduction continued, with a net negative six percent of all owners reporting growth in inventories (seasonally adjusted), 3 points better than February, but still more owners reducing stocks than adding to them. This survey was conducted in March 13. A sample of 3,938 small-business owners/members was drawn. Seven hundred fifty-nine (759) usable responses were received a response rate of 19 percent. 1 NFIB Small Business Economic Trends Monthly Report

4 CAPITAL SPENDING When it comes to business investment, owners are still in maintenance mode. The frequency of reported capital outlays over the past six months rose 1 point to 57 percent, rising steadily since January, though by very small amounts. The percent of owners planning capital outlays in the next three to six months was unchanged at 25 percent. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 25 percent. Four percent characterized the current period as a good time to expand facilities (down 1 point), historically a very weak number. The net percent of owners expecting better business conditions in 6 months was a net negative 28 percent, unchanged from February but 7 points better than December. These readings are among the lowest in the 4 year history of the NFIB survey. INFLATION Seventeen (17) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 1 point), and 18 percent reported price increases (down 3 points). Seasonally adjusted, the net percent of owners raising selling prices was a negative 1 percent, down 3 points. There isn t much Main Street inflation when more firms are cutting average selling prices than raising them. Twenty-one (21) percent plan on raising average prices in the next few months (down 5 points), and 3 percent plan reductions (up 1 point). Seasonally adjusted, a net 17 percent plan price hikes, down 6 points. Main Street is certainly behaving the way the Fed likes, no price pressures to be seen. 2 NFIB Small Business Economic Trends Monthly Report EARNINGS AND WAGES Reports of positive earnings trends improved 3 points, but landed at a negative 23 percent, a very poor reading. Progress, but not much. At the same time, the Fortune 5 is posting record high profits. Clearly we have a bifurcated economy, with large firms making hay but GDP growing little. If all firms were publically traded, the stock market wouldn t look so good. Five percent reported reduced worker compensation and 21 percent reported raising compensation, yielding a seasonally adjusted net 16 percent reporting higher worker compensation (up 2 points). This is good news for employees. So, compensation has not yet produced a lot of pressure on prices. Instead, profit performance has been depressed. Looking forward, owners face rising costs from energy, health care and regulatory compliance, adding a lot of cost without contributing much if anything to productivity improvements or cost reductions. CREDIT MARKETS Credit demands remained weak in March. Twenty-nine (29) percent reported all credit needs met, and 49 percent explicitly said they did not want a loan (64 percent including those who did not answer the question, presumably uninterested in borrowing as well). Seven percent of owners surveyed reported that all their credit needs were not met, unchanged from February and 3 points above the record low.

5 COMMENTARY Small business produces half the private GDP and employs half the private sector workforce. But it is not growing, not hiring, not borrowing and not expanding enough. Small business owners have been depressed since 7 and that has not changed. In the March survey of NFIB s 35, member firms, 77 percent expect the economy to be no better or even worse 6 months from now that it is currently. Only 4 percent think the current period is a good time to expand substantially, compared to an average of 17 percent for the period 1973 to 7. More owners plan to reduce employment in the coming months than plan to create new jobs. More owners plan to reduce their inventories than plan to order new stocks. The bulk of growth comes from the increase in our population of about 3 million people and the growing need to simply replace stuff that is wearing out, not enough to get the economy back to trend growth much less the strong growth needed to restore employment to 7 levels. The Federal Reserve continues to assert its intention to purchase a trillion dollars of Treasury securities and mortgages, adding a trillion dollars to its portfolio and stuffing a trillion dollars of new liquidity into the banking system, until the unemployment rate falls below 6.5% or inflation breaks out. Then it will consider changing policy. Unless something really bad happens, this is a winning strategy for the Fed because eventually the private sector will improve, the labor force will shrink (as boomers leave), the unemployment rate will fall and the Fed can claim its policies worked, even if their policies made no contribution to the improvement or even slowed it down by creating uncertainty and fear among investors and business owners. This is a risky strategy. The evidence that uncertainty is slowing the economy is pretty clear now (research at the San Francisco Federal Reserve for example) and uncertainty probably increases with the size of the Fed s portfolio (as has the price of gold). The real economy is hardly growing yet the stock market and corporate profits are at record high levels. How do we make a record amount of money without producing more output and employing more workers? Such contradictions breed uncertainty. In the meantime, a record low percentage of small business owners claim that credit is their top business problem (3%) while taxes get the most votes (23%). Record numbers of owners have no interest in a loan (over 6%), because they have no use for the funds that have a high probability of successfully generating a return so the loan can be repaid. The Fed has made sure that there is plenty of money to lend, but in the process may have reduced the confidence that borrows need to take risks, borrow, spend and expand. And then there s the impact of fiscal policy (or the lack of a policy). The President is flying around the country doing fund-raisers and stumping for gun control, but he still has presented no budget proposal. Enough said. 3 NFIB Small Business Economic Trends Monthly Report

6 OVERVIEW - SMALL BUSINESS OPTIMISM OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=) 1 Index Value (1986=) 9 8 OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=) SMALL BUSINESS OUTLOOK 4 NFIB Small Business Economic Trends Monthly Report Percent "Good Time to Expand" (thick line) 3 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 13 Reason Good Time Not Good Time Uncertain Economic Conditions Sales Prospects Fin. & Interest Rates 1 1 Cost of Expansion 3 2 Political Climate 16 6 Other/Not Available 1 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 13 - 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 13 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 April 13-4 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 13 4 Net Percent of Firms 3 - Planned - Actual -3 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 4 3 EMPLOYMENT Planned Next Three Months and Current Job Openings January 1986 to March 13 Planned Job Openings - 9 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 13 Planned Higher Actual Higher -5

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) 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/ 3/8 28/9 3/ 28/ 3/7 3/ 29/9 29/ 28/8 27/11 29/9 29/11 28/9 28/8 25/ 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 12 3/7 31/7 27/8 31/8 29/9 29/7 3/7 31/7 32/8 28/8 28/6 29/ /6 29/7 29/7 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 13 Actual Planned -3

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 15 5 Percent -5 Inventory Plans - Inventory Satisfaction CAPITAL EXPENDITURES Actual Last Six Months and Planned Next Three Months January 1986 to March 13 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, $, to $49, $5, to $99, $, 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 13 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 4 3 SELECTED SINGLE MOST IMPORTANT PROBLEM Inflation, Big Business, Insurance and Regulation January 1986 to March 13 Big Business Inflation Insurance Regulation 18 NFIB Small Business Economic Trends Monthly Report Percent of Firms 4 3 SELECTED SINGLE MOST IMPORTANT PROBLEM Taxes, Interest Rates, Sales and Labor Quality January 1986 to March 13 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 15 5 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