Business Owners Skeptical of Economic Recovery, Report Finds

A report from the National Federation of Independent Business (NFIB) found although small business owners still remain skeptical of economic recovery, the organization's optimism index rose 0.3 points in October to 89.1, 8.1 points higher than the survey's second lowest reading reached in March. Four of the 10 index components posted gains, two were unchanged and four declined. "The October gain was minor, so the good news is still less bad news," said NFIB chief economist William C. Dunkelberg.

In terms of employment, eight percent of businesses surveyed reported unfilled job openings, unchanged from August and September. Over the next three months, 16 percent said they plan to reduce employment (unchanged), and nine percent plan to create new jobs (up two points), yielding a seasonally adjusted net-negative one percent of owners planning to create new jobs, a three-point improvement. In the last three months, eight percent of the owners increased employment, but 19 percent reduced employment (seasonally adjusted). While Dunkelberg noted both statistics are better than September readings, the "job-generating machine" is still in reverse.

Owners continued to reduce compensation at a record pace, with 11 percent reporting reduced worker compensation. Reports of increased compensation fell three points to 11 percent. Seasonally adjusted, a net four percent reported raising worker compensation, down three points from September and only one point above June's record low reading.

For those businesses that want to borrow, getting a loan continues to be difficult, with a net 14 percent reporting loans harder to get than in their last attempt. "With very weak plans to make capital expenditures, add to inventory and expand operations, it would appear that many of those trying to borrow are having cash flow difficulties due to very weak sales, most frequently reported as the top business problem," Dunkelberg said.

Thirty-three percent reported regular borrowing, unchanged from September. Overall, loan demand remains weak due to widespread postponement of investment in inventories and record low plans for capital spending, Dunkelberg said. In addition, he pointed out continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers. "This has resulted in tougher terms and higher loan rejection rates, even with no change in lending standards," he said.  

Reports of positive profit trends were unchanged at a net-negative 40 percentage points. The persistence of this imbalance is bad news for the small business community and a contributor to the reported difficulties in obtaining credit, Dunkelberg said. For those reporting lower earnings compared to the previous three months (52 percent, up two points), 62 percent cited weaker sales, four percent each blamed rising labor costs and higher materials costs, two percent blamed higher insurance costs, and eight percent blamed lower selling prices. Four percent blamed regulatory costs. "Poor sales and price cuts are responsible for much of the weakness in profits," said Dunkelberg.