“The failure of the index to rebound from historic low readings as it did in 1980 indicates that the recession will encompass the first quarter, with little chance for a bottom before the second quarter,” said NFIB Chief Economist William Dunkelberg.
Owners responding to the survey reported that there was a decline in average employment in January (seasonally adjusted), the second largest monthly decline in survey history (December was the largest). Eight percent of owners increased employment by an average of 3.3 workers per firm, but 23 percent reduced employment.
Eleven percent (seasonally adjusted) reported unfilled job openings, down three points from December (the 34-year average is 22 percent), indicating a substantial increase in the unemployment rate (between 7.5 percent and 8 percent) in the next few months.
Over the next three months, 9 percent plan to create new jobs (up 1 point), and 14 percent plan workforce reductions (down 5 points), yielding a seasonally adjusted net-negative 6 percent of owners planning to create new jobs, the third-lowest reading in survey history and unchanged from December. Lower readings occurred only in the 1974—5 and the 1980—82 recessions.
“Owners are reducing employment in record numbers,” Dunkelberg said.
After falling five points in December, the frequency of reported capital outlays over the past six months was steady at 51 percent of all firms. Owners continue to defer any project not essential to the survival of the firm. Thirty-seven percent reported spending on new equipment (up a point), 19 percent acquired vehicles (down two points), and 13 percent improved or expanded their facilities (up two points). Five percent acquired new buildings or land for expansion (up a point) and 11 percent spent money for new fixtures and furniture (up two points). “There is a pulse, but it’s weak and the pool of deferred projects continues to grow,” the economist said.
Plans to make capital expenditures over the next few months rose 2 points to 19 percent, still historically very low, but at least headed up . Six percent characterized the current period as a good time to expand facilities, down a point from December and historically low. A net-negative 12 percent expect business conditions to improve over the next six months, a point better than December.
Inventories and Sales
Expectations for gains in real sales gave up 2 points, falling to a net-negative 20 percent expecting improvements— one of the worst readings in survey history, but still better than the negative 23 percent reading in 1980 .
Small business owners continued to liquidate inventories. A net-negative 18 percent of all owners reported gains in inventory stocks, three points better than December, but the 10th negative, double-digit month in a row and the 20th negative month in a row. Unadjusted, 8 percent reported gains and 32 percent reported inventory reductions.
For all firms, a net-negative 6 percent (a one-point improvement) reported stocks too low, seasonally adjusted. The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months lost two points, falling to a net-negative 31 percent, the worst reading in survey history. Unadjusted, 15 percent of all owners reported higher sales (unchanged) and 50 percent reported lower sales.
Plans to add to inventories (on purpose) lost six percentage points, falling to net-negative 10 percent of all firms, seasonally adjusted. Seasonally unadjusted, 12 percent plan to add to stocks (unchanged) while 17 percent will reduce stocks (unchanged).
The frequency of reports of price cutting in the prior three months reached what Dunkelberg described as “frenetic levels” in January. The net percent of owners reporting higher average selling prices dropped 9 percentage points to a net-negative 15 percent.
“This represents a 47 percentage point decline in the percent of owners raising average selling prices since July 2008, an unprecedented decline in six months,” said the economist. Unadjusted, 15 percent reported raising average selling prices, down two points, and 28 percent reported lower selling prices, up four points from December.
The percent of owners citing inflation as their No.1 problem fell a point to 6 percent. In July, 20 percent cited inflation as their single most important problem, indicating that inflation is fading as a concern for owners, replaced by worries over declining sales.
Reports of positive profit trends gave up another five points, falling to a negative 47 percentage points, a new record low and quite a contrast to a year ago, when reports of positive profit trends were 20 points better . Not seasonally adjusted, 10 percent reported profits higher (down two points), but 58 percent reported profits falling (up five points). Pricing power has vanished and reports of sales declines are at record-high levels. Wage pressures are falling, providing some positive support to the bottom line.
Among owners reporting higher earnings (10 percent, down two points), 60 percent cited stronger sales (up 17 percentage points) as the cause, and 10 percent credited higher selling prices. For those reporting lower earnings compared to the previous three months (58 percent, up five points), 59 percent cited weaker sales (up eight points), 12 percent cited higher materials costs (including energy), 5 percent blamed lower selling prices, 3 percent named higher compensation costs and 2 percent cited insurance costs. Overall, the poor profit picture is a result of reduced consumer spending and dramatic declines in selling prices.
The credit market picture is mixed: as the economy weakens, loan demand fades as fewer capital projects are planned and inventory investment falls. But for some owners, loan demand does rise to secure the cash needed for survival. Only 35 percent reported regular borrowing, up two points and typical of the past 20 years. Because of the slowdown in the economy, the credit worthiness of many potential borrowers has deteriorated over the last year, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards).
The net percent of owners reporting loans harder to get rose a point to 13 percent of all firms, one point higher than the expansion high reached in 1991. No credit crunch has appeared to date beyond the normal cyclical tightening of credit. Fewer loans are being made, but a substantial share of the decline is due to lower demand, not problems on the supply side.
The percent of owners citing financing and interest rates as their single most important problem rose one point to 4 percent (the average since 1986 is 3 percent). The percent of owners reporting lower interest rates on their most recent loan exceed those reporting higher rates by 12 percentage points, as the Fed rate cuts work their way through the variable rate loans.
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 is the nation’s leading small business association . A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its members in Washington and all 50 state capitals.