NFIB SBET Report

 Contact: Melissa Sharp 202-314-2068

Small Business Owners Optimism Returns

The month’s real bounce was the soft indicators, the “feel good” portion of the survey. The outlook for general business conditions moved sharply higher, jumping by 24 points and leaving a majority judging that conditions would improve over the next three to six months. Expectations for gains in real sales increased 20 points, rising to a net-negative 11 percent expecting improvements—still negative but a solid move up from the March record low.

 

 

The small business jobs picture continues downward, confirming the bad news to date and anticipating a poor May showing. Four percent of owners increased employment over the last three months, but 30 percent reduced it. Nine percent (seasonally adjusted) reported unfilled job openings, down a point from March, relatively stable for the past few months and historically low. Over the next three months, 10 percent plan to reduce employment (down two points), and 13 percent plan to create new jobs (up a point), yielding a seasonally adjusted net negative 5 percent of owners planning to create new jobs, a five-point improvement. “It appears that owners are not through with their labor-based cost cutting,” Dunkelberg said.

 

In addition to reducing employment, owners are reducing compensation. A record-high 11 percent reported cutting worker compensation and a near-record-low 12 percent reported raising worker compensation, helping to keep the lid on labor costs. Seasonally adjusted, a net 5 percent reported raising worker compensation, a point higher than the record low set last month.

 

The frequency of reported capital outlays over the past six monthsfell four points to 46 percent of all firms, 10 points lower than this time last year. Owners continue to defer any project not essential to the survival of the firm. Plans to make capital expenditures over the next few months rose three points to 19 percent, historically very low but on the upswing for a change. Four percent said the current period is a good time to expand facilities, up three points from March. “But, the longer the owners postpone, the larger the pool of pent up demand will grow for new equipment and improvements and expansion of facilities that will eventually re-start the economy,” said Dunkelberg.

 

Small business owners continued to liquidate inventories. A net 27 percent of all owners reported lowered inventory stocks, four points worse than March, and a new record low. Inventories are being reduced at a record pace. For all firms, a net-negative 5 percent (a one-point deterioration) of owners reported stocks too low. Seasonally unadjusted, 12 percent plan (on purpose) to add stocks (unchanged) while 17 percent will reduce stocks (down three points).  “New orders will remain depressed until stocks look lean relative to expected sales, which are finally starting to show some improvement, even if still on the dark side,” said Dunkelberg.

 

Price pressures make it difficult for small business owners to generate enough capital internally to make capital outlays, even if they were inclined to do so. In April, 12 percent of small business owners reported raising their average selling prices (down a point), while 34 percent reported reductions in average selling prices. Seasonally adjusted, the net percent of owners raising prices was negative 24 percent, far more cutting prices than raising them. Plans to raise prices rose one point to a net-seasonally-adjusted 1 percent of owners, 37 points below the July 2008 reading. This may reflect a return to some level of normality after the huge markdowns from the fourth quarter.

 

April’s profits reports improved three points, a move in the right direction, but still leaving profit trends in dismal territory. The month’s readings stood at a net-negative 43 percentage points, not much to cheer about. 

 

Of owners reporting higher earnings (11 percent, unchanged), 55 percent cited stronger sales (up nine percentage points) as the cause and 9 percent each credited lower labor and materials costs and higher selling prices. For the large majority, those  reporting lower earnings compared to the previous three months (60 percent, down three points), 60 percent cited weaker sales, 7 percent blamed lower selling prices, 5 percent blamed higher materials costs, 2 percent each blamed higher insurance costs, higher regulatory costs and rising labor costs. Credit costs were a problem for 2 percent. The net-percent of all owners (seasonally adjusted) reporting higher sales in the past three months gained six points, rising to a net-negative 28 percent. The month’s results still show substantially more with falling sales than rising sales.  “Weak sales and price cuts are responsible for much of the weakness in profits. Rising labor costs are not an issue,” Dunkelberg said.

 

As the economy weakened, loan demand faded as fewer capital projects were undertaken and inventory investment fell as stocks were liquidated. Thirty-three percent reported regular borrowing, typical of the past 20 years. Thirty percent reported all their borrowing needs met (up a point) compared to 8 percent who reported problems obtaining desired financing (down two points). The net percent reporting all borrowing needs satisfied rose three points to 22 percent. 

 

The net percent of owners reporting loans harder to get rose to 14 percent of all firms, the highest reading since the 1980-82 recession period. Four percent of owners reported finance as their No.1 business problem, unchanged for years. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 12 percent.

“At least we seem to be headed in the right direction,” said Dunkelberg. “Typically, optimism first returns, then spending follows as confidence builds. But there are a lot of difficult days ahead, even if April’s data represents a turnabout.”

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