Economic Woes Worry Main Street

October’s churning economic activity clearly worried small business owners. The National Federation of Independent Business Index of Small Business Optimism fell 5.4 points to 87.5 (1986=100), the third lowest reading in the 35-year history of the survey.

Washington, DC (Vocus) November 11, 2008 -– October’s churning economic activity clearly worried small business owners. The National Federation of Independent Business Index of Small Business Optimism (http://www.nfib.com/research) fell 5.4 points to 87.5 (1986=100), the third lowest reading in the 35-year history of the survey.

“The decline in the index is a clear indication that the economy is solidly lodged in a recessionary mire,” said NFIB Chief Economist William Dunkelberg (http://www.nfib.com/object/IO_15869.html). “The third-quarter decline in Gross Domestic Product was not large, 0.3 percent at an annual rate, but consumer spending – 70 percent of GDP – was down more than 3 percent. The consumer does not appear ready to get into a holiday mood to save the fourth quarter numbers,” the economist said.

Please see the attached table for a breakdown of the components and the changes from last month’s Index (http://www.nfib.com/object/IO_38974.html).

Employment

Seasonally adjusted, average employment per firm declined by 0.41 workers in October, a reading worse than September’s. Nine percent of the owners increased employment by an average of 2.7 workers per firm, but 17 percent reduced employment an average of 2.7 workers per firm, seasonally adjusted.

Forty-six percent of the owners hired or tried to hire (down three points), and 76 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. Eight percent of the owners reported that the availability of qualified labor was their top business problem, down from 17 percent in September 2007. Fourteen percent (seasonally adjusted) reported unfilled job openings, down four points from September (the 34 year average is 22 percent), anticipating another up tick in the unemployment rate.

Over the next three months, 9 percent plan to create new jobs (down three points), and 15 percent plan workforce reductions (up five points), yielding a seasonally adjusted net-zero percent of owners planning to create new jobs, seven points lower than September and one of the lowest readings in survey history. Only the 1974-75 and 1980-82 recession periods produced lower readings.

Capital Spending

“While Fed policy may be keeping financing costs low, the weak economy has reduced the need for expansion and new equipment putting pressure on cash flows and inducing owners to postpone discretionary capital outlays,” said Dunkelberg. “The frequency of reported capital outlays over the past six months rose two points to 54 percent of all firms, still at recession levels historically, but at least it didn’t fall.”

Thirty-six percent reported spending on new equipment (unchanged), 20 percent acquired vehicles (up three points), and 13 percent improved or expanded their facilities (up one point). Twelve percent spent money for new fixtures and furniture (up 1 point); 5 percent acquired new buildings or land for expansion (down two points).

Plans to make capital expenditures over the next six months fell two points to 19 percent. This reading was last this low in 1975 and only lower at 16 percent in 1974. “Clearly in this uncertain environment, owners are postponing any capital projects that are not essential to the operation of the firm,” Dunkelberg said.

Five percent characterized the current period as a good time to expand facilities, down six points – the lowest reading since 1982, and the second lowest in survey history. A net-negative 4 percent expect business conditions to improve over the next six months, an 18 point decline from September, but far from a record-low level.

Inventories and Sales

Small business owners continued to liquidate inventories. A net-negative 13 percent of owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), the seventh negative double-digit month and the seventeenth negative month in a row. Unadjusted, 11 percent reported gains, and 23 percent reported inventory reductions.

For all firms, a net-negative 4 percent (three points worse than September) reported stocks too low, seasonally adjusted. The net percent of all owners, seasonally adjusted, reporting higher sales in the past three months lost 10 points, falling to a net-negative 21 percent, the worst reading in survey history. Unadjusted, 20 percent of all owners reported higher sales (down six points), and 37 percent reported lower sales (up six points).

Owners are still satisfying customer demand out of current inventories and plans to replace stocks are weak. Expectations for gains in real sales also declined, falling 14 points to a net-negative 16 percent who expect improvements (the second worst reading in survey history). Weak demand was the single most important business problem in September, taxes was second, and inflation and cost and availability of insurance tied for third.

Poor sales expectations produced a decline in plans to add to inventories with the net percent planning to add to stocks falling two points to a net-negative 5 percent of all firms, seasonally adjusted. Seasonally unadjusted, 10 percent plan to add to stocks (unchanged), while 20 percent will reduce stocks (up four points). “This is very bad news for manufacturer’s order books.” Dunkelberg said.

Inflation

Price pressures continue to abate with sales trends now at recession levels. The net percent of owners reporting higher average selling prices dropped five points to a net 15 percent in October, seasonally adjusted, down 17 points since July. “The bad news is that this is still a high reading, inflation, especially core inflation, is not going away quietly,” Dunkelberg said.

Unadjusted, 29 percent reported raising average selling prices, down five points, and 17 percent reported lower selling prices, up two points from September. The percent of owners citing inflation as their No.1 problem fell five points to 11 percent, about half its level a few months ago.

Plans to raise prices fell six points to a net, seasonally-adjusted 18 percent of owners, 20 points below the July reading, signaling good news for the Fed.

Earnings

The net percent of owners reporting earnings gains was unchanged in October and at a dismal level. Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 35 percentage points. With a decline in the percent of firms raising selling prices, it has become harder to pass on the pressures from “backdoor inflation”, one of the top-rated business problems. The percent of all firms reporting higher employee compensation fell two points to 15 percent of all firms, but this was not enough to support profit improvement.

Of the owners reporting higher earnings (13 percent, down four points), 54 percent cited stronger sales (up one point) as the cause, and 8 percent each credited lower materials costs and higher selling prices. For those reporting lower earnings compared to the previous three months (41 percent, down four points), 59 percent cited weaker sales (up 18 points), 27 percent cited higher materials costs (including energy), and 10 percent blamed lower selling prices. Two percent each cited higher insurance costs, higher labor costs or higher taxes for the adverse performance of profits.

Credit

As the economy weakens, loan demand continues to be soft. Only 33 percent reported regular borrowing, a point higher than September, but historically low (the 35-year low is 31 percent). Because of the slowdown in the economy, the credit worthiness of 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) for some owners.

Thirty-one percent reported all their borrowing needs met compared to 6 percent who reported problems obtaining desired financing. The net percent reporting borrowing needs satisfied was down two points from September. The net percent of owners reporting loans harder to get fell two points to 9 percent of all firms from its cyclical high of 11 percent reached in September.

The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net-negative 16 percent (more owners expect that it will be harder to arrange financing), three points worse than September (the average was a net-negative 8 percent in 2007). Owners expect deteriorating economic conditions to make borrowing more difficult.

NFIB’s Small Business Economic Trends is a monthly survey of small business owners’ plans and opinions. Decision makers at the federal, state and local levels actively monitor these reports, ensuring that the voice of small business is heard. The NFIB Research Foundation conducts some of the most comprehensive research of small business issues in the nation. The National Federation of Independent Business is the nation’s leading small business association (http://www.nfib.com/). A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its members in Washington and all 50 state capitals.

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