Survey: Small Business Optimism at Recession Level

WASHINGTON, D.C.— The National Federation of Independent Business Index of Small Business Optimism fell one point to 88.2 (1986=100) in July, establishing one of the longest strings of recession-level readings in the history of the survey. Half of the decline was due to weaker capital spending plans—the lowest reading since 1975. Lower earnings, fewer job openings and lower inventory satisfaction also posted substantial declines, but those were mostly offset by gains in expected real sales, business conditions and the percent of owners saying this is a good time to expand.

Plans to make capital expenditures over the next few months fell five points to 21 percent, the weakest reading since the 1970s. Six percent characterized the current period as a good time to expand facilities, up two points from June, but historically low. Last September, 14 percent felt it was a good time to expand operations. A net-negative 17 percent expect business conditions to improve over the next six months, a two-point improvement from June but 19 points below last September’s reading. Expectations for increases in real sales improved two points to a net-negative 9 percent of those responding (23 points below September readings).

Seasonally adjusted, small business employment was reported lower by an average of negative 0.25 workers per firm in the July survey. Ten percent of the owners increased employment by an average of 3.3 workers per firm, but 15 percent reduced employment an average of 3.0 workers per firm. The increase in the federal minimum wage means owners will pay more for the same work, raising labor costs for some firms.

“The labor market is softening,” said NFIB Chief Economist William Dunkelberg. Forty-nine percent of the owners hired or tried to hire (up two points), and 74 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill, 10 points below third-quarter readings a year ago. Seventeen percent (seasonally adjusted) reported unfilled job openings, down four points from June (the 34- year average is 22 percent). Ten percent of the owners reported that the availability of qualified labor was their top business problem, unchanged from June.

Over the next three months, 12 percent plan to create new jobs (down two points), and 10 percent plan workforce reductions (up two points), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs—unchanged from June. Not seasonally adjusted, job creation plans were positive in all industry groups except the retail and wholesale trades. Job expansion plans were strongest among firms in professional services, manufacturing and construction.

The frequency of reported capital outlays over the past six months was unchanged at 52 percent of all firms. Spending activity has declined eight points since last September and has fallen to early 1980s levels. Thirty-eight percent reported spending on new equipment (down 1 point), 19 percent acquired vehicles (down 3 points), and 10 percent improved or expanded their facilities (unchanged).

“The construction industry remains soft and a drag on the economy,” said Dunkelberg. Over the past few months, only 7 percent of construction firms increased inventories while 24 percent reported reductions. Only 4 percent plan increases in the third quarter compared to 19 percent that plan inventory reductions. Still, more owners in the construction industry plan to expand employment (19 percent) than plan reductions (12 percent). Thirteen percent reported cutting average selling prices, but 48 percent reported price hikes in spite of overall weakness in construction activities. Inflation (on the input or cost side) was the No. 1 problem facing construction firm owners. Even with the price hikes, 45 percent of the owners reported lower earnings, quarter over quarter, compared to 18 percent reporting gains.

A net-negative 14 percent of all small firms reported gains in inventory stocks (i.e. more firms cut stocks than added to them, seasonally adjusted), three points worse than June. Unadjusted, 12 percent of owners reported gains, and 22 percent reported inventory reductions. The widespread inventory reductions have not produced increased satisfaction with current stocks because sales have also weakened, reducing the need for more inventory in the near future. For all firms, a net-negative 4 percent reported stocks too low (seasonally adjusted), three points worse than June

The net percent of owners expecting gains in real sales volumes improved to a net-negative nine points (up two points) seasonally adjusted, 23 points below last September’s reading.  “But, this is not a positive outlook and consequently, a net-negative 4 percent of all firms, seasonally adjusted, plan to add to stocks, a point better than June but weak,” said Dunkelberg. Seasonally unadjusted, 10 percent plan to add to stocks (down one point) while 16 percent will reduce stocks (unchanged).

More firms are reporting deteriorating sales trends than sales gains, quarter over quarter. The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months lost 3 points, falling to a negative 15 percent.  Unadjusted, 26 percent of all owners reported higher sales, and 32 percent reported lower sales.

The net percent of owners reporting higher average selling prices rose another 3 points to a net 32 percent in July. The percent of owners citing inflation as their No.1 problem remained at 20 percent, the highest reading since January 1982, and higher than any other single concern. The average percent of owners citing inflation as their No. 1 problem since the monthly surveys were started in 1986 is 3 percent. Plans to raise prices rose two points to a net seasonally-adjusted 38 percent of all owners. “The inflation problem is getting worse, not better,” said Dunkelberg. Unadjusted, 42 percent reported raising average selling prices, up one point, and 11 percent reported lower selling prices, down two points from June.

The net percent of owners reporting earnings improvements declined further in July. Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 37 percentage points, four points worse than June. Widespread price increases did not counter pressures from “backdoor inflation” and weak sales. The percent of all firms reporting higher employee compensation fell two points to a net 18 percent of all firms, nine points below last September’s reading. But it was not sufficient to turn profit trends around.

Of the owners reporting higher earnings (17 percent, up two points), 53 percent cited stronger sales (unchanged) as the cause, 12 percent credited higher selling prices (down a point), and 6 percent named lower materials costs. For those reporting lower earnings compared to the previous three months (48 percent, up one point), 40 percent cited weaker sales (down three points), 31 percent blamed higher materials costs (read energy), and 8 percent each blamed higher labor costs and lower selling prices. Two percent each cited higher insurance costs and higher taxes for the adverse performance of profits. Another 2 percent blamed higher financing costs, the first appearance of this complaint in years.

For the eleventh straight month since the Fed declared the existence of a credit crunch, no evidence of serious credit problems has appeared on Main Street. Regular borrowing activity was reported by 34 percent of the owners, down a point from June and typical of readings for the past 15 years. There is no evidence that cash flow problems have increased dependence on credit from the banking system.

The net percent of owners reporting loans harder to get in recent months rose two points to a net 9 percent (10 percent said harder, 1 percent said easier). Only 3 percent of the owners cited the cost and availability of credit as their No.1 business problem (up one point), far from the record 37 percent reached in 1982. Thirty-two percent reported all their borrowing needs met (down three points) compared to 7 percent who reported problems obtaining desired financing (up two points), a five-point deterioration in the net percent reporting all needs met, but far from critical levels.

Fewer firms reported lower rates on their loans, dropping the net percent of owners reporting higher rates on their short-term loans seven points to a negative 4 percent (seasonally adjusted). “If the Fed is truly through cutting rates, this statistic will migrate towards zero or a positive number over the coming months,” said the economist.

The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net-negative 12 percent, two points worse than June. “Apparently, owners do not expect the Fed’s easing of interest rates to help,” Dunkelberg said.

Plan to increase employment 5 0
Plan to increase capital outlays* 21 -5
Plan to increase inventories -4 +1
Expect economy to improve -17 +2
Expect higher real sales -9 +2
Current inventory satisfaction -4 -3
Current job openings* 17 -4
Expected credit conditions -12 -2
Now a good time to expand* 6 +2
Earnings trends -37 -4


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 (NFIB) is the nation’s largest small-business advocacy group. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its members in Washington and all 50 state capitals.

*Note: These components are measured as actual percentages of all respondents and are not net percentages.  A net percentage is the percent positive minus percent negative.

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