The average percent of owners citing inflation as problem No.1 since the monthly surveys were started in 1986 is 3 percent
Washington, DC (Vocus) December 9, 2008
Small business owners broadly and sharply feel the impact of the recession. While the National Federation of Independent Business Index of Small Business Optimism rose a marginal 0.3 points to 87.8 (1986=100), it was the fourth lowest reading in the 35-year history of the survey. Inflationary pressures eased significantly, with the net percent of owners reporting higher average selling prices plunging to zero percent, a 15-point decline from October and one of the lowest readings ever.
Please see the attached table for a breakdown of the components and the changes from last month’s Index.
The decline in average employment per firm of 0.08 (seasonally adjusted) was not nearly as bad as September and October. Nine percent increased employment by an average of 6.5 workers per firm; 19 percent reduced employment an average of 3.4 workers per firm (seasonally adjusted).
Forty-three percent of those surveyed hired or tried to hire (down three points), and 72 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 said that the availability of qualified labor was their top business problem, down from 17 percent in September 2007.
“Labor markets have loosened up substantially,” said NFIB Chief Economist William Dunkelberg. Fourteen percent (seasonally adjusted) reported unfilled job openings, unchanged from October. The 34 year average is 22 percent.
Over the next three months, 6 percent plan to create new jobs (down three points), and 17 percent plan workforce reductions (up two points), yielding a seasonally adjusted net-negative 4 percent of owners planning to create new jobs, one of the lowest readings in survey history. (Lower readings occurred only in the 1974-75 and the 1980-82 recession periods.)
The frequency of reported capital outlays over the past six months rose two points to 56 percent of all firms, still at recession levels. “The weak economy has reduced the need for expansion and new equipment and put pressure on cash flows, inducing owners to postpone discretionary capital outlays,” said the economist.
Thirty-eight percent reported spending on new equipment (up two points), 19 percent acquired vehicles (down a point), 14 percent spent money for new fixtures and furniture (up two points), and 13 percent improved or expanded their facilities (unchanged). Five percent acquired new buildings or land for expansion (unchanged). Overall, spending is weak, but the frequency of outlays has improved for the last two months.
There was a slight increase in the number of owners planning to make capital expenditures over the next few months: up two points to 21 percent; only in 1974-75 were capital spending plans lower. “In this uncertain environment, owners are postponing any capital projects that are not essential to the operation of the firm, or that they can’t afford or can’t finance,” Dunkelberg said.
Seven percent characterized the current period as a good time to expand facilities, up two points, but very low. A net-negative 2 percent expect business conditions to improve over the next six months, a two-point increase from October, and far from the record expansion low level of negative 23 percent reached in March of this year. Expectations for gains in real sales also improved a bit, rising two points to a net-negative 14 percent of owners expecting improvements – all in all, a very poor environment for capital spending.
Inventories and Sales
Small business owners continued to liquidate inventories. A net-negative 17 percent of owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted, four points worse than October), the eighth negative, double-digit month in a row, and the 18th negative month in a row. Unadjusted, 10 percent reported gains, and 27 percent reported inventory reductions.
A net-negative 4 percent of all firms (unchanged) reported stocks too low (seasonally adjusted). The net percent of all owners reporting higher sales in the past three months (seasonally adjusted) lost four points, falling to a net-negative 25 percent, the worst reading in the 35-year survey history. Unadjusted, 18 percent of all owners reported higher sales (down two points), and 40 percent reported lower sales (up three points).
The net percent of owners expecting gains in real sales volumes fell to a net-negative 14 points (up two points) seasonally adjusted. Poor sales expectations caused owners to reduce plans to add to inventories, with the net percent planning to add to stocks falling a point to a net-negative 6 percent of all firms, seasonally adjusted. Seasonally unadjusted, 9 percent plan to add to stocks (down a point) while 20 percent will reduce stocks (unchanged).
Profit gains deteriorated another three points to a negative 38 percentage points. Not seasonally adjusted, 14 percent reported profits higher, but 50 percent reported profits falling. Of the owners reporting higher earnings (14 percent, unchanged), 64 percent (up 14 points) cited stronger sales as the cause, and 7 percent each credited lower materials costs and higher selling prices. For those reporting lower earnings compared to the previous three months (50 percent, up two points), 54 percent cited weaker sales (up four points), 24 percent cited higher materials costs (including energy) and 8 percent blamed lower selling prices.
The net percent of owners reporting earnings gains deteriorated further in November. Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 38 percentage points, the second worst showing in 35 years of survey history.
Price pressures vanished in November. The net percent of owners reporting higher average selling prices dropped 15 points to a net zero percent in November (seasonally adjusted, down 32 points since July). Unadjusted, 21 percent reported raising average selling prices, down eight points, and 23 percent reported lower selling prices, up six points from October. The percent of owners citing inflation as their No.1 problem fell two points to 9 percent.
“The average percent of owners citing inflation as problem No.1 since the monthly surveys were started in 1986 is 3 percent,” said Dunkelberg. “Clearly, owners are still troubled by inflation (‘back door’ hikes in prices), but the decline from 20 percent citing inflation as their single most important problem in July is promising.”
The number of those planning to raise prices fell 7 points to a net, seasonally-adjusted 11 percent of owners, 27 points below the July reading, and good news for the Federal Reserve.
“Pricing power has vanished and reports of sales declines are at record high levels,” Dunkelberg said. “Profits can’t improve in this environment.”
As the economy weakens, loan demand continues to decline. Only 31 percent reported regular borrowing, down two points and equal to the 35-year, record-low reading. Plans to add to inventories and plans for capital outlays have declined to historically low levels since September of 2007. The credit worthiness of potential borrowers has also deteriorated over the last year, leading to more difficult terms and higher loan rejection rates, even with no change in lending standards.
Thirty-one percent reported all their borrowing needs met compared to 7 percent who reported problems obtaining desired financing. The net percent of owners reporting loans harder to get rose two points to 11 percent of all firms, revisiting the expansion high reached in September. No credit crunch has appeared to date beyond the normal cyclical tightening of credit.
“Overall, it appears that Main Street credit conditions have not worsened in proportion to the Wall Street experience and interest rates are falling, especially for those with variable rate loans. This means borrowers have more to spend, although dollar for dollar, savers have less,” Dunkelberg said.
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. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its members in Washington and all 50 state capitals.