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

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1 NFIB SMALL BUSINESS ECONOMIC TRENDS William C. Dunkelberg Holly Wade March 216 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 9% -1 * Plans to Make Capital Outlays 25% * Plans to Increase Inventories -2% -1 * Expect Economy to Improve -17% 4 * Expect Real Sales Higher 1% 1 * Current Inventory -5% -3 * Current Job Openings 25% -3 * Expected Credit Conditions -6% 1 * Now a Good Time to Expand 6% -2 * Earnings Trends -22% -1 * Total Change -3 1% (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

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 Director of Research and Policy Analysis 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 1 NFIB Small Business Economic Trends Monthly Report SUMMARY OPTIMISM INDEX The Index of Small Business Optimism fell.3 points from February, falling to Statistically, no change. Four of the 1 Index components posted a gain, six posted small declines, the biggest gain was in Expected Business Conditions, a 4 point improvement to a still very negative number. For a broader perspective, the Index has turned decidedly south over the last 15 months falling from a reading of 1 in December 214 to A chartist looking at the data historically might conclude that the Index has clearly hit a top and is flashing a recession signal. The April survey will decide whether or not the alarm should be rung. This month s change was not statistically significant, just not in a positive direction. LABOR MARKETS Reported job creation improved in March, with the average employment change per firm rising to an average gain in employment of.2 workers per firm, not much, but positive. Forty-eight percent reported hiring or trying to hire (down 1 point), but 41 percent reported few or no qualified applicants for the positions they were trying to fill. Twelve percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem. Twenty-five percent of all owners reported job openings they could not fill in the current period, down 3 points. This is still a solid reading historically but is the second monthly decline, suggesting that labor market tightness has faded a little. Ten percent reported using temporary workers, unchanged from February, but 4 points below readings a few months ago. A seasonally adjusted net 9 percent plan to create new jobs, down 1 point from February, 6 points from December. INVENTORIES AND SALES The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months worsened by 2 points, falling to a net negative 8 percent. Thirteen percent cited weak sales as their top business problem, up 2 points. Overall, this is not a strong sales picture. Expected real sales volumes posted only a 1 point gain, rising to a seasonally adjusted net 1 percent of owners expecting gains, a weak showing. This is well below the average 14 point reading in the first three months of 215. The net percent of owners reporting inventory increases was unchanged at a net negative 3 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as too low deteriorated 3 points a net negative 5 percent. The net percent of owners planning to add to inventory declined a point to a net negative 2 percent. These weak inventory investment readings are consistent with the rather dismal view owners have about future sales and economic progress. This survey was conducted in March 216. A sample of 5, small-business owners/members was drawn. Seven hundred and twenty-seven (727) usable responses were received a response rate of 15 percent.

4 2 NFIB Small Business Economic Trends Monthly Report CAPITAL SPENDING Fifty-nine percent reported capital outlays, up 1 point. Overall, capital spending reports were more frequent but there was little new strength in spending. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 25 percent, restoring the January reading. Seasonally adjusted, the net percent expecting better business conditions improved 4 percentage points to a net negative 17 percent, after falling 12 points in the prior 3 months. The seasonally adjusted net percent expecting higher real sales was 1 percent of all owners, not very strong. Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment. INFLATION Seasonally adjusted, the net percent of owners raising selling prices was negative 4 percent, for the third month in a row. Twenty-two percent plan on raising average prices in the next few months (up 3 points) while only 4 percent plan reductions (up 1 point), far fewer than actually report reductions. Seasonally adjusted, a net 17 percent plan price hikes (up 3 points). Prospects for a resurgence of inflation are low, and that s a good thing (except for the Fed which is trying to create inflation). EARNINGS AND WAGES A seasonally adjusted net 22 percent of owners reported raising worker compensation, unchanged from February but down 5 points from the expansion high level reached in January. The net percent planning to increase compensation rose 4 points to a net 16 percent, a significant increase. With more firms cutting selling prices than raising them, customers are being spared picking up the cost of rising compensation. Earnings trends worsened 1 point to a negative 22 percent reporting quarter on quarter profit improvements. Far more owners are reporting profits lower quarter to quarter than higher. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem was unchanged at 12 percent. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees. CREDIT MARKETS Five percent of owners reported that all their borrowing needs were not satisfied, 3 points above the record low reached in September, 215. Thirty-one percent reported all credit needs met (unchanged), and 53 percent explicitly said they did not want a loan. For most of the recovery, record numbers of firms have been on the credit sidelines, seeing no good reason to borrow. Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes and 21 percent citing regulations and red tape. Thirty-two percent of all owners reported borrowing on a regular basis, up 1 point but historically low. The average rate paid on short maturity loans fell 1 basis points to 5.2 percent. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, a point better than February.

5 3 NFIB Small Business Economic Trends Monthly Report COMMENTARY Apparently, New York Federal Reserve President William Dudley s walk back of prospects for a second rate hike in Hangzhou last month was not satisfactory, so Chair Yellen added her support to keeping the status quo. Financial markets applauded, but the real sector did not, with consumer and small business sentiment falling. Financial markets of course thrive on the variability such policy pronouncements and policies produce. Bonds have been made very unattractive by Federal Reserve policy, so equities are the only game in town that might promise a yield. Low interest rates are great if they occur in an economy that presents investment opportunities. This is not the case for our current economy. There is no cheerleader for the economy who convincingly promises improvement. There is little hope that government will constructively address the problems that concern consumers and small businesses. The most likely prospects to assume the presidency don t appear to be connected to reality. There is no prospect that the avalanche of resource-wasting regulations will abate much less be reversed. The experts at the Federal Reserve only raise uncertainty with their pronouncements and seem detached from the real economy, focused instead on financial markets. Two of our largest states have passed a $15 minimum wage, preventing millions of lower skilled and young workers from ever getting their first job. None of this makes sense to Main Street businesses or many consumers who think government economic policies are bad by a 2 to 1 margin. The mess we are now in is the cumulative result of decades of misdirected, special interest policies, attempts to redistribute income and manipulate private sector firms with volumes of regulations and taxes. The Fed continues to confuse and confound. It is unsettling that the Fed (a) is trying to create inflation when historically managing inflation was the central bank s job (b) will do anything, including negative interest rates, to pursue this 2% objective without questioning the sense of it and (c) continues to think that its low interest rate policy will create jobs when the uncertainty the Fed creates holds spending back. Low rates are not sufficient to stimulate hiring and spending if investing in workers or new capital shows little promise of paying off. The Fed has not been able to attain either its goal of 2% inflation or maximum employment (whatever this is) with its policies, yet it keeps on going (remember the definition of insanity?). The small business sector, which historically produced half of our private GDP and served as the R&D sector of our economy (this is where new ideas are tested by markets, the proper evaluator, not government), is underperforming, doing little more than operating in maintenance mode. Slow economic growth is now just a result of population growth, more haircuts, retail customers, health care patients, etc. But there is no exuberance, no optimism and not much hope, the numbers make it clear.

6 4 NFIB Small Business Economic Trends Monthly Report Percent "Good Time to Expand" (thick line) Percent "Better" Minus "Worse" Expected General Business Conditions (thin line) 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 OUTLOOK Good Time to Expand and Expected General Business Conditions January 1986 to March

7 5 NFIB Small Business Economic Trends Monthly Report 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 216 Reason Good Time Not Good Time Uncertain Economic Conditions Sales Prospects Fin. & Interest Rates Cost of Expansion 3 4 Political Climate Other/Not Available OUTLOOK FOR GENERAL BUSINESS CONDITIONS Net Percent ( Better Minus Worse ) Six Months From Now

8 6 NFIB Small Business Economic Trends Monthly Report SMALL BUSINESS EARNINGS EARNINGS Actual Last Three Months January 1986 to March 216 Net Percent ACTUAL EARNINGS CHANGES Net Percent ( Higher Minus Lower ) Last Three Months Compared to Prior Three Months MOST IMPORTANT REASON FOR LOWER EARNINGS Percent Reason March 216 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 7 NFIB Small Business Economic Trends Monthly Report SMALL BUSINESS SALES Net Percent SALES Actual (Prior Three Months) and Expected (Next Three Months) January 1986 to March Expected -3 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

10 8 NFIB Small Business Economic Trends Monthly Report Net Percent of Firms SMALL BUSINESS PRICES PRICES Actual Last Three Months and Planned Next Three Months January 1986 to March Planned -2 Actual ACTUAL PRICE CHANGES Net Percent ( Higher Minus Lower ) Compared to Three Months Ago PRICE PLANS Net Percent ( Higher Minus Lower ) in the Next Three Months

11 Percent 9 NFIB Small Business Economic Trends Monthly Report 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 EMPLOYMENT Planned Next Three Months and Current Job Openings January 1986 to March Planned Job Openings

12 1 NFIB Small Business Economic Trends Monthly Report Net Percent 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 SMALL BUSINESS COMPENSATION COMPENSATION Actual Last Three Months and Planned Next Three Months January 1986 to March 216 Planned Actual

13 11 NFIB Small Business Economic Trends Monthly Report 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

14 12 NFIB Small Business Economic Trends Monthly Report 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 AVAILABILITY OF LOANS Net Percent ( Easier Minus Harder ) Compared to Three Months Ago (Regular Borrowers)

15 Avg. Short-term Rate (thick line) Rate Relative (thin line) 13 NFIB Small Business Economic Trends Monthly Report 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 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 31/8 29/9 29/7 3/7 31/7 32/8 28/8 28/6 29/ /6 29/7 29/7 31/6 28/5 29/5 3/5 31/5 28/6 28/6 32/4 32/ /5 29/5 3/5 3/5 3/5 27/6 3/6 28/4 28/6 29/4 29/4 32/ /4 33/3 35/5 31/4 3/4 32/5 32/4 33/3 3/2 3/3 32/3 32/ /3 31/4 31/5 EXPECTED CREDIT CONDITIONS Net Percent ( Easier Minus Harder ) During Next Three Months (Regular Borrowers) INTEREST RATES Relative Rates and Actual Rates Last Three Months January 1986 to March

16 14 NFIB Small Business Economic Trends Monthly Report Net Percent 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 SMALL BUSINESS INVENTORIES INVENTORIES Actual (Last Three Months) and Planned (Next Three Months) January 1986 to March 216 Actual Planned

17 15 NFIB Small Business Economic Trends Monthly Report 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

18 16 NFIB Small Business Economic Trends Monthly Report 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 Percent -5-1 Plans Satisfaction CAPITAL EXPENDITURES Actual Last Six Months and Planned Next Three Months January 1986 to March Actual Expected ACTUAL CAPITAL EXPENDITURES Percent Making a Capital Expenditure During the Last Six Months

19 17 NFIB Small Business Economic Trends Monthly Report 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 1 3 CAPITAL EXPENDITURE PLANS Percent Planning a Capital Expenditure During Next Three to Six Months

20 18 NFIB Small Business Economic Trends Monthly Report Percent of Firms Percent of Firms SINGLE MOST IMPORTANT PROBLEM Problem SINGLE MOST IMPORTANT PROBLEM March 216 Current One Year Ago Survey High Survey Low Taxes Inflation Poor Sales Fin. & Interest Rates Cost of Labor Govt. Regs. & Red Tape Comp. From Large Bus Quality of Labor Cost/Avail. of Insurance Other SELECTED SINGLE MOST IMPORTANT PROBLEM Inflation, Big Business, Insurance and Regulation January 1986 to March 216 Big Business Inflation Insurance Regulation SELECTED SINGLE MOST IMPORTANT PROBLEM Taxes, Interest Rates, Sales and Labor Quality January 1986 to March 216 Taxes Sales 3 Interest Rates & Finance Labor Quality

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

22 2 NFIB Small Business Economic Trends Monthly Report 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? 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 21 NFIB Small Business Economic Trends Monthly Report 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?