NFIB SMALL BUSINESS. William C. Dunkelberg Holly Wade 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

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1 NFIB SMALL BUSINESS ECONOMIC TRENDS William C. Dunkelberg Holly Wade December 29 Based on a Survey of Small and Independent Business Owners 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 Index Component Adjusted Level Last Month Index Change Plans to Increase Employment -3% -2 * Plans to Make Capital Outlays 16% -1 * Plans to Increase Inventories -3% * Expect Economy to Improve 3% -8 * Expect Real Sales Higher -2% 2 * Current Inventory -2% 1 * Current Job Openings 8% * Expected Credit Conditions -15% 1 * Now a Good Time to Expand 8% 1 * Earnings Trends -43% -3 * Total Change -9 * 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 THIS ISSUE Summary Commentary Optimism Outlook Earnings Sales Prices Employment Compensation Credit Conditions Inventories Capital Outlays Most Important Problem Survey Profile Economic Survey

3 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?

4 SUMMARY OPTIMISM INDEX The Index of Small Business Optimism lost.8 points, falling to 88.3 (1986=1), 7.3 points higher than the survey s second lowest reading reached in March (the lowest reading was 8.1 in 198:2). In the recession period, the Index was below 9 in only one quarter and quickly surged to a record high level in early In this recession, the Index has been below 9 for six quarters, indicative of the severity of this downturn. LABOR MARKETS In November small business owners reported a decline in average employment per firm of.58 workers reported during the prior three months, a big improvement from May s record loss of 1.26 workers per firm - but still a loss of jobs. Nine percent of the owners increased employment by an average of 2.3 workers per firm, but 21 percent reduced employment an average of 4.2 workers per firm (seasonally adjusted). The job generating machine is still in reverse. Sales are not picking up, so survival requires continuous attention to costs and labor costs loom large. But, job reductions are fading and job creation could cross the line by the end of the year. CAPITAL SPENDING The frequency of reported capital outlays over the past six months dropped one point to 44 percent of all firms, revisiting the record low reading set in September (data first collected in 1979). Capital spending is on the sideline. Plans to make capital expenditures over the next few months fell one point to 16 percent, revisiting the 35 year record low. Consumer spending is weak and there is nothing on the table in Washington to make owners more optimistic about the future, a recipe for depressed expectations and spending plans. INVENTORIES AND SALES The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months remained negative at negative 31 percent, unchanged from October and only three points above the record low set in March and revisited in June and July. The net percent of owners expecting real sales gains improved two points to a negative two percent of all owners, still negative but 27 points better than the March record low level. Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. A net negative 25 percent of all owners reported gains in inventory stocks, one point better than October and only two points better than the record low of negative 27 recorded each month from April through July. For all firms, a net negative two percent (a one point improvement) reported stocks too low. Plans to add to inventories (on purpose) were unchanged at a negative three percent of all firms (seasonally adjusted). Only a pick-up in sales will turn this around. This survey was conducted in November 29. A sample of 3,938 small-business owners/members was drawn. Eight hundred twenty-five (825) usable responses were received a response rate of 21 percent. 1 NFIB Small Business Economic Trends Monthly Report

5 2 NFIB Small Business Economic Trends Monthly Report INFLATION The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 29 percent reported price reductions. Widespread price cutting is a major factor driving the reports of lower nominal sales. Seasonally adjusted, the net percent of owners raising prices was negative 17 percent (unchanged), far more cutting prices than raising them. Plans to raise prices fell one point to a net seasonally adjusted four percent of owners, 34 points below the July 28 reading. On the cost or input side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the back door of the business) rose one point to three percent 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 are at a net negative 43 percentage points, three points worse than October. The persistence of this imbalance is bad news for the small business community and a contributor to the reported difficulties in obtaining credit. Not seasonally adjusted, 1 percent reported profits higher (down two points), but 51 percent reported profits falling (unchanged). Spending or hiring will not increase until these trends reverse. Owners continued to reduce compensation at a record pace, with 1 percent reporting reduced worker compensation. Reports of increased compensation fell two points to nine percent. Seasonally adjusted, a net three percent reported raising worker compensation, down one point from October and a revisit of June s record low reading. For those reporting lower earnings compared to the previous three months (51 percent, down one point), 61 percent cited weaker sales, four percent each blamed rising labor costs and higher materials costs, two percent blamed higher insurance costs, and eight percent blamed lower selling prices. Four percent blamed regulatory costs. Poor sales and price cuts are responsible for much of the weakness in profits. CREDIT MARKETS For those who want to borrow, getting a loan continues to be difficult, with a net 15 percent reporting loans harder to get than in their last attempt. Twenty-four months of recession have sapped the financial strength of many small firms. Thirty-three (33) percent reported regular borrowing, typical of the post-1983 period, unchanged from October. Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many potentially 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. Twenty-nine (29) percent reported all their borrowing needs met (unchanged) compared to 1 percent who reported problems obtaining desired financing (up one point, not seasonally adjusted). The recession is now 24 months old, straining the financial resources of more and more small firms. The economy may have turned, but it is a slow turn so far.

6 COMMENTARY Owner optimism remains stuck at recession levels. The proximate cause is very weak consumer spending, better than a year ago, but that was pretty bad. Fifteen (15) percent reported gains, while 43 percent reported weakness. With weak consumer spending, there is little need to invest in inventory (and borrow money to support inventory investment). Inventory investment plans are at historically very low levels. Similarly capital spending is on hold, with actual outlays and planned outlays at record low levels along with the demand for loans to finance the outlays. More firms still plan on reducing employment than plan on adding to their payrolls. Inventory reductions are still widespread, eight percent reported accumulation, 33 percent reported reductions. This sets the stage for new orders in future periods, but does not help much now. The construction industry, bloated during the bubble is still in shambles, there are too many houses in too many places (like Florida and California, significant parts of our economy). But the other major concern is the level of uncertainty being created by government, the usually source of uncertainty for the economy. The turbulence created when Congress is in session is often debilitating, this year being one of the worst. Themes including tax more, tax the rich even more, VAT taxes, higher energy costs due to Cap and Trade, mandates and taxes for health care, threats of stimulus II, incomprehensible deficits, and a huge pool of liquidity created by the Federal Reserve Bank that threatens price stability and higher interest rates. The list goes on and on. There is not much to look forward to here and good reason to keep your powder dry. Uncertainly is the enemy of the real economy as well as financial markets. Pent up demand (cars, for example) is restarting the economy, house prices have stopped falling in many areas, the stock market is better, and this will encourage the top 2 percent of the income distribution, which accounts for half of consumption spending, to pick up the pace. Santa Clause did deliver some nice revisions to the jobs numbers that will cheer everyone up as we watch the change in employment cross the line maybe by the end of the year (private sector jobs will finally take the lead). But there are still many uncertainties ahead (most in Congress) that need to be resolved and plenty of income redistribution yet to come as we continue to clean up our financial system - all which creates major headwinds for the economy. 3 NFIB Small Business Economic Trends Monthly Report

7 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 4 NFIB Small Business Economic Trends Monthly Report Percent "Good Time to Expand" (thick line) Good Time to Expand and Expected General Business Conditions January 1986 to November Percent "Better" Minus "Worse" Expected General Business Conditions (thin line)

8 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 November 29 Reason Good Time Not Good Time Uncertain Economic Conditions Sales Prospects Fin. & Interest Rates 2 1 Cost of Expansion Political Climate 8 3 Other/Not Available 3 1 OUTLOOK FOR GENERAL BUSINESS CONDITIONS Net Percent ( Better Minus Worse ) Six Months From Now NFIB Small Business Economic Trends Monthly Report

9 SMALL BUSINESS EARNINGS EARNINGS Actual Last Three Months January 1986 to November 29-1 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 November 29 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.

10 SMALL BUSINESS SALES Net Percent SALES Actual (Prior Three Months) and Expected (Next Three Months) January 1986 to November 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

11 SMALL BUSINESS PRICES Net Percent of Firms PRICES Actual Last Three Months and Planned Next Three Months January 1986 to November Planned 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

12 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 November 29 Planned Job Openings NFIB Small Business Economic Trends Monthly Report

13 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 November 29 1 Planned Higher 5 Actual Higher

14 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 Increase and Net Percent Compensation Actual Prices Actual Compensation NFIB Small Business Economic Trends Monthly Report

15 SMALL BUSINESS CREDIT CONDITIONS Net Percent of Firms CREDIT CONDITIONS Loan Availability Compared to Three Months Ago* January 1986 to November * 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)

16 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) 24 36/6 36/8 38/6 37/6 34/5 34/5 37/5 35/7 36/5 35/5 36/3 39/ /4 39/4 39/5 38/6 41/4 39/5 34/5 36/4 34/4 34/5 39/4 35/ /4 37/6 36/6 38/5 38/5 39/5 38/4 44/4 34/4 36/7 34/4 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 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 November Rate Relative (thin line) 13 NFIB Small Business Economic Trends Monthly Report

17 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 November 29 Actual Planned

18 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

19 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 November Actual Planned Percent NFIB Small Business Economic Trends Monthly Report ACTUAL CAPITAL EXPENDITURES Percent Making a Capital Expenditure During the Last Six Months

20 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

21 SINGLE MOST IMPORTANT PROBLEM Problem SINGLE MOST IMPORTANT PROBLEM November 29 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 Inflation, Big Business, Insurance and Regulation January 1986 to November 29 Big Business Inflation Insurance Regulation Percent of Firms 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 November 29 Taxes Interest Rates & Finance Sales Labor Quality

22 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 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 Monthly Report

23 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?