Report Shows Small Business Owners View Economy as Less Bad

 

In September, small business owners reported a decline in average employment of 0.83 workers per firm during the prior three months, a substantial improvement from May but virtually no change from July and August and historically the sixth largest loss per firm in the 35 year survey history (the record is negative 1.26 in May, 2009). Seven percent of the owners increased employment and 23 percent reduced employment, yielding a seasonally adjusted net negative 16 percent of owners decreasing employment in the last three months, unchanged from August. 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.

 

Eight percent (seasonally adjusted) reported unfilled job openings, also unchanged from August. Over the next three months, 16 percent plan to reduce employment (up 3 points), and 7 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net negative 4 percent of owners planning to create new jobs, a 4 point deterioration from last month.

 

The frequency of reported capital outlays over the past six monthsfell 1 point to 44 percent of all firms, a record low reading (data first collected in 1979). Of those making a capital outlay, 30 percent reported spending on new equipment (down 1 point), 16 percent acquired vehicles (up 3 points), and 9 percent improved or expanded their facilities (down 2 points). Overall, a dismal performance, only vehicle purchases were up most likely due to the cash for clunkers program. Plans to make capital expenditures over the next few months rose 2 points from a 35 year record low to 18 percent. Nine percent characterized the current period as a good time to expand facilities, up 4 points from August, a good sign. However, a net 8 percent expect business conditions to improve over the next six months, down 2 points from August but 11 points ahead of the July reading.

 

The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months was negative 26 percent, up a point and 8 points better than the record low set in March and revisited in July. After a 6 point increase in August, the net percent of owners expecting real sales gains gave up a point, falling to a negative 6 percent of all owners, still negative but 25 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 24 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted).

 

The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 32 percent reported price reductions. Widespread price cutting is a major factor shaping the reports of lower nominal sales. Seasonally adjusted, the net percent of owners raising prices was negative 21 percent, with far more cutting prices than raising them and 2 points more negative than August. Plans to raise prices fell 2 points to a seasonally adjusted net 6 percent of owners, 32 points below the July 2008 reading. On the cost or input side, the percent of owners citing inflation as their number one problem was steady at 4 percent, so neither labor costs nor materials costs are pressuring owners. 

 

Reports of positive profit trends were unchanged at a net negative 40 percent. Of those reporting lower earnings compared to the previous three months, 62 percent cited weaker sales, 2 percent blamed rising labor costs, 6 percent blamed higher materials costs, 2 percent blamed higher insurance costs, and 8 percent blamed lower selling prices. Weak sales and price cuts are responsible for much of the weakness in profits.

 

“The persistence of this imbalance is bad news for the small business community and a contributor to the reported difficulties in obtaining credit,” said Dunkelberg. Owners continued to reduce compensation at a record pace, with 11 percent reporting reduced worker compensation. Reports of increased compensation did rise 2 points to 14 percent, a good sign in this environment. Seasonally adjusted, a net 7 percent reported raising worker compensation, up 1 point from August but only 4 points above June’s record low reading.

 

Thirty-three percent reported regular borrowing, typical of the post-1983 period and down a point from July. Overall, loan demand remains weak due to widespread postponement of investment in inventories and record low plans for capital spending. Of all borrowers, 30 percent reported all their borrowing needs met (unchanged) compared to 10 percent who reported problems obtaining desired financing (up 3 points). The net percent of owners reporting loans harder to get was unchanged at 14 percent of all firms. But only 4 percent of the owners reported finance as their number-one business problem. Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. 

 

“It is no surprise that credit is more difficult to obtain since sales prospects and profit trends are very weak,” said Dunkelberg.

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