NFIB

A Flat Road Ahead
03/ 28/ 2002

by Bill Dunkelberg

The latest revisions in the economic statistics indicate that the economy slowed substantially in the second half of 2000, much sooner than previously thought. Growth in real Gross Domestic Product for the year was revised downward by a full point, from 5 percent to 4 percent--a major downward revision that further supports the findings from the NFIB survey that suggest that the economy peaked early in 2000.

The weakness in the economy has come primarily from a decline in investment spending (primarily plant and equipment, as housing has held up pretty well) which from 1995 to 2000 was the driving force behind economic growth.

Investment spending reached a record 18 percent of GDP in 2000. But such spending can't stay at record levels since it creates capacity faster than we can use it and that is what causes the "break" in spending that is weakening the current economy.

Although the "big guys" account for a huge share of capital spending, small business has participated in the "boom and bust" in investment as well. In February 2000, 40 percent of all firms reported plans for capital outlays. In June of this year, the figure was 30 percent. Supporting this, reports of actual outlays have declined from 72 percent of all firms to 62 percent over roughly the same period. The capital spending boom for small business peaked in the first quarter of 2000.

The net percentage of firms planning to expand employment now stands at 10 percent, down from 22 percent at the end of 1999. Job creation has turned negative in 2001, so instead of creating 200,000+ new paychecks each month as we did in 2000, we are now eliminating paychecks and this has produced a slowdown in consumer spending.

Firms are still relatively optimistic however, with a net 10 percent of all firms expecting the economy to be better by year-end and a net 10 percent expecting their real sales volumes to improve by year-end. Let's hope these small business owners are good forecasters!

NFIB's Small Business Economic Trends, begun in 1973, is the longest continuous survey of small business optimism and conditions. It is frequently quoted by Federal Reserve Chairman Alan Greenspan and national media. Monthly surveys are sent to more than 2,500 NFIB members and quarterly surveys are sent to more than 7,500 members. The few minutes members spend completing the surveys adds to NFIB's stature as the source of the nation's foremost research about small business.

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This article originally appeared in the September/October 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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