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Small Business Optimism Declines in June

July 14, 2010

The National Federation of Independent Business Index of Small Business Optimism lost 3.2 points in June falling to 89.0 after posting modest gains for several months*. The Index has been below 93 every month since January 2008 (30 months), and below 90 for 23 of those months, all readings typical of a weak or recession-mired economy.

Seventy percent of the decline this month resulted from deterioration in the outlook for business conditions and expected real sales gains. Owners have no confidence that economic policies will fix the economy. “The U.S. economy faces hurricane force headwinds and the government is at the center of the storm, making an economic recovery very difficult,” said William Dunkelberg, NFIB’s chief economist.

Employment – Average employment growth per firm turned negative in April of 2007 and has remained negative for 10 of the 12 following quarterly readings ending with a negative .18 in April (seasonally adjusted). May and June show no reversal in the bad news, posting average declines of negative .48 and negative .28 workers per firm respectively. In June, 9 percent (seasonally adjusted) reported unfilled job openings, unchanged from May and historically very weak.  Over the next three months, 8 percent plan to reduce employment (up one point), and 10 percent plan to create new jobs (down four points), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, unchanged from the May reading and positive for the second time in 20 months.

Capital Spending and Outlook – The frequency of reported capital outlays over the past six months was unchanged at 46 percent of all firms, two points above the 35-year record low (reached most recently in December 2009). Of those making capital expenditures, 30 percent reported spending on new equipment (down two points), 15 percent acquired vehicles (down two points), and 11 percent improved or expanded facilities (unchanged). Four percent acquired new buildings or land for expansion (down one point), and 9 percent spent money for new fixtures and furniture (down one point). The percent of owners planning to make capital expenditures over the next few months fell one point to 19 percent, 3 points above the 35 year record low.  Six percent characterized the current period as a good time to expand facilities, up 1 point. But a net negative 6 percent expect business conditions to improve over the next six months, down 14 points from May. “Owners do not trust the economic policies in place or proposed, and they are distressed by global and national developments that make the future more uncertain,” said Dunkelberg.

Sales and Inventories – The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months lost four points, falling to a net-negative 15 percent, 19 points better than June 2009, but still far more firms are reporting negative sales trends quarter-to-quarter than positive.  The net percent of owners expecting real sales gains lost 10 points, falling to a net-negative 5 percent of all owners (seasonally adjusted). “Hiring and capital spending depend on expectations for growth in future sales, so the outlook for improved spending and hiring is not good,” said Dunkelberg. Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock.  A net-negative 21 percent of all owners reported gains in inventories (more firms cut stocks than added to them, seasonally adjusted), one point worse than May.  Plans to add to inventories declined five points to net-negative 3 percent of all firms (seasonally adjusted).

Inflation – The weak economy continued to put downward pressure on prices.  Thirteen percent of owners (down one point) reported raising average selling prices, and 27 percent reported average price reductions (down one point).  Seasonally adjusted, the net percent of owners raising prices was a negative 13 percent, a two point increase in the net percent raising prices.  June is the 19th consecutive month in which more owners reported cutting average selling prices rather than raising them. Plans to raise prices fell three points to a seasonally adjusted net 11 percent of owners.

Earnings – A net-negative 32 percent of small business owners reported positive profit trends, three points worse than in June and 28 points worse than the best expansion reading reached in 2005.  The persistence of this imbalance is bad news for the small business community.  Profits are important for the support of capital spending and expansion. Owners continued to hold the line on compensation, with 8 percent reporting reduced worker compensation, and 13 percent reporting gains.  Seasonally adjusted, a net 4 percent reported raising worker compensation, only six points better than February’s record low reading of net-negative 2 percent. “In past recovery periods, compensation improved at a much faster pace than we have experienced in this recovery period,” said Dunkelberg.

Credit – Regular NFIB borrowers (29 percent accessing capital markets at least once a quarter, a survey record low) continued to report difficulties in arranging credit. A net 13 percent reported loans harder to get than in their last attempt, unchanged from May.  Overall, 90 percent of the owners reported all their credit needs met (or they did not want to borrow). “The small business sector is not on a positive trajectory and with this half of the private sector missing-in-action, the economy’s poor growth performance is no surprise,” said Dunkelberg. “Small business owners are not happy about the future of the economy being painted by the administration or economic events. Confidence is lacking and the news out of Washington is discouraging. Until this changes, don’t expect small businesses to start hiring.”

*The survey was conducted through June 30 and represents 805 small business owner respondents.

  
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