NFIB

Optimism Takes a Dip
03/ 22/ 2002

by Bill Dunkelberg

The October 1987 stock market crash had no impact on the NFIB measures of small business economic performance, leading to a prediction at the time that the "New York Event" would have no substantial impact on the real economy. In the aftermath of the terrorist attacks of September, the stock market had its worst week in 70 years. However, in contrast to the 1987 event, this event has had a material impact on the real economy.

The complete shutdown of the air transport system will have far-reaching effects on sales well beyond the immediate impact on the travel and leisure industry. The regional distribution of revenue will be changed. Some of the money "not spent" in the weeks immediately following the attack will be spent later, but in different places and for different things, creating inventory imbalances, excess capacity in some cities and regions, etc. Additionally, there is the uncertainty of the "war" -- how big, how long, here or "there," and how safe. At least in the short run, "inventory turns" will be lower due to the transportation delays resulting from increased security and the return on assets (profits) will be reduced. Most difficult to quantify is the psychological impact on spending--how big and how long.

Offsetting this are (1) a huge monetary stimulus, most of which has not "hit" the real economy yet, (2) falling energy costs, (3) an increasingly expansive fiscal policy, and (4) low inflation. These factors are supportive of a healthy business climate and economic growth.

In August, it appeared that the small business economy was starting to recover, with hiring plans and job openings up and optimism about the economy rising to a point that historically was always followed by a pickup in economic growth. But the Small Business Optimism Index fell by over 7 points from August to the second half of September. This is the lowest monthly reading since 1993.

Small business owners seem to have taken the attack personally, posting widespread reductions in expected real sales gains over the next three months. This component has never gone negative in the history of the monthly survey (started in 1986). The previous low was 0 in 1991.

In spite of the declines, the percent of firms expecting better business conditions in six months is still above the Jan.-July average for the year.

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 November/December 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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