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Friday, January 15, 2010

Small Business Hope And Change

The NFIB surveys are done one month and compiled and published the next month, so the January survey covers December. It's sad.

It declined again, but less than it did in November. There's very little positive in this and a lot of negatives, and this is particularly worrisome given the general worries for 2010, especially....
Ten percent of the owners increased employment, but 22 percent reduced employment (seasonally adjusted). While the trend for increased employment is going in the right direction, there is no indication that job growth will be strong enough to dramatically reduce the unemployment rate. Ten percent (seasonally adjusted) reported unfilled job openings, up two points from November, a good sign. Over the next three months, 15 percent plan to reduce employment (down two points), and eight percent plan to create new jobs (up one point), yielding a seasonally adjusted net negative two percent of owners planning to create new jobs, a one point improvement from November.
Reports of positive profit trends were unchanged at a net negative 43 percentage points.
The whole thing is just as depressing as anything I've ever read. If you have no credit background, you probably won't find some of this as surprising as I do. Small business owners are generally an over-optimistic lot. One older lender told me that he split their profit forecasts into thirds when figuring credit carrying capacity. One third he always credited them with as long as they had been making it. The next third he credited or debited based on the current economy and their recent record. The last third he almost never gave them. He said he was usually within ten percent of actual.

I will just quote a bit from the summary without comment, except to note that the political division known as "Independents" on political surveys contains many people who are in business for themselves.
So why hasn’t owner optimism soared like it usually does at the end of a recession, especially one that cut so deeply into our economic fabric? The answer is “hope and change.” There is little hope and the change that is being delivered is far from encouraging. Washington is offering nothing but higher taxes and fines and fees and more regulation. Congress is passing bills with thousands of pages of hidden bombs that will go off as the legislation is passed and implemented. Federal spending has soared amazingly, yet been ineffective except at pushing the federal deficit to incomprehensible heights, promising to double our national debt in just a few years. The interest burden this will place on average Americans is astounding. Uncertainty is the enemy of economic growth and investment, and Washington, D.C., the usual source of uncertainty, is delivering plenty
of it. Confidence in our political leadership has tanked.

So we begin the year with capital spending and inventory investment plans in record low territory as well as job creation plans. More owners expect sales to fall than to increase in the first quarter, more have been cutting workers and worker compensation than increasing them and reports of actual spending on capital projects are at 35 year historic lows.
Both energy taxes and health care are striking fear into the hearts of the people who have been the job creators over the last few decades. But nobody's listening. The 35 years quoted in this survey go back as far as the survey history. From the small business POV, this recession is far worse than the 80s.

If you don't know what labor and energy are going to cost, only a fool or a supremely confident owner is going to make capital investments. This isn't rocket science, but it does seem to be beyond the reach of the Democratic House leadership.
John - another way to put that is that small business owners tend to be confident, optimistic, and have a lot of experience in scouting out business and adapting.

But they are not idiots - the idiots running business go out very quickly. They are a group selected for certain characteristics, and foolhardiness is not one of those characteristics. When you really know nothing about the future, you cannot invest money in it.
This comment has been removed by a blog administrator.
Obama and the Dems are doing a worse job than Bush2 did at running the country.Now THAT takes some real effort.
"Both energy taxes and health care are striking fear into the hearts of the people who have been the job creators over the last few decades. But nobody's listening."

The small business sector has been dependent on excess credit to fuel its growth. While Congress may be viewed as positive or negative toward this segment via tax policy
it probably will not have much impact either way in the immediate future. Thomas Palley notes "The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on consumption fuelled by indebtedness and asset price inflation, and it is done".

There were also a lot of real productivity gains, both from new technology and the large Baby Boom cohort going through their years of maximum earning potential. It wasn't all about the debt.

The problem was that nobody was willing to plan for the year the Boomers started retiring.
I work in IT(databases) for a small consulting company and am seeing an interesting (but to me good) uptick in business. Last year was pretty slim. This year is looking at long term contracts to support upgrade, optimization and consolidation efforts for databases. It seems that many businesses have waited as long as they think they can to not spend money and are just now starting to work on their suffering and outdated IT infrastructure. I think this is so that they can stay in business more than they just "want" to stay up to date on their technology.

Interestingly, the medical sector that we work with are very reluctant to optimize despite the govt. $$$ that should be available to implement their software. Transportation is also lagging behind. Other sectors are waking up and starting to work on these projects.

What are you seeing from the "soft" sector such as IT?

-- Army Mom
"it wasn't all about the debt."

Palley would agree with you as he was pointing out that the economic landscape has changed dramatically so using past data points to predicate future economic directions might be misleading.
While it may not have been all about debt in the past it looks like it will be now.
Ronald - first, not all small businesses are services for consumers. Some are the inevitable result of cuts at large companies (I include sole proprietorships /contractors in this group).

But we can't expect business spending overall to improve, although I think Army Mom is describing a reality. Businesses are prioritizing spending and fixing spending in the "must" and "save margin" categories.

And it isn't ALL about debt for consumers - many of them will walk away from most of their debt (and some have). As the consumer debt load trickles down, consumers will slowly clear more income for primary consumption.

But in a broader sense (as I think you mean), the capacity overshoot generated from our borrowing lifestyles is still here, and means that business investment will be highly constrained. The strongly optimistic feel that the Asians and other developing countries will pick up the consumption slack. I don't think so - just as small business incomes in the US are hurting from constrained incomes, incomes in many Asian countries were related to capacity growth, foreign investment and the borrowing and spending in the developed countries.

We have a global imbalance; countries with high incomes and high consumption have shifted a lot of their fundammental production to countries with lower incomes. That is now cutting incomes in those developed countries.

Singapore's real GDP in Q4 contracted at an annualized rate of 6.8%. Manufacturing contracted over 38% - far worse than the Q4 08 drop.
Army Mom - I think you summed it up pretty well!

Businesses are cutting total spending, but are now spending in areas in which they have to spend to keep going, and in any areas that can show that they can drive business and profit. (Such as tested proven advertising.)

In a lot of ways the economy is still adapting, and in some cases that adaptation is in its early stages. But the dam has broken for some of the same reasons that consumers are buying cars or spending to fix their current cars - they have to do it.

If you look at total business spending, the fat is still being cut. Those sales meetings, perks, etc, are all still dribbling down. Businesses will spend money necessary to stay in business, and they will spend money to try to drive up revenues if they can maintain a profit margin. But the free and easy days are long gone.
PS - Medical businesses are mostly cutting - they are afraid to spend because they have no idea of what the situation will be a year from now.
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