Small Business Optimism at Recession Level

Washington, DC, Oct. 15, 2008--The National Federation of Independent Business Index of Small Business Optimism rose 1.8 points to 92.9 (1986=100) in September, continuing one of the longest strings of recession-level readings in the history of the survey. But the index did rise for the second month in a row.

"Dramatic improvements in the percent of owners expecting the economy to improve over the next six months and solid plans to invest in new inventories accounted for the early surge, but the bulk of the gains were erased by events from mid-month on," said NFIB Chief Economist William Dunkelberg.

The NFIB survey responses were segregated into two groups, those responding before Sept. 15 (the Lehman Brothers bankruptcy) and after.  In the last two weeks, owner optimism was hammered by the events beginning on the 15th and subsequently plans to create jobs and invest in inventories or capital expansion fell (reducing loan demand).

Expectations for business conditions, real sales and expected credit conditions experienced severe losses after mid-month. The Index value through the 15th was 94, and had the mood prevailed, optimism would have shown a large improvement.  But it registered just 90 after the 15th, leaving the month's optimism index up just slightly.

Regular small business borrowers reported that credit is at its tightest point.  A net 11 percent of small business owners reported credit "harder to get" in September.

Seasonally adjusted, there was a decline in average employment per firm of 0.34 workers in September, much worse than August.  Eight percent of the owners increased employment by an average of 3.4 workers per firm but 18 percent reduced employment an average of 3.1 workers per firm (seasonally adjusted).

The frequency of reported capital outlays over the past six months fell two points to 52 percent of all firms, still at recession levels historically.  "While Fed policy may be keeping financing costs low, the weak economy has reduced the need for expansion and new equipment and put pressure on cash flows, inducing owners to postpone discretionary capital outlays," Dunkelberg said.

Plans to make capital expenditures over the next few months fell 2 points to 21 percent, historically very weak.  "Clearly in this uncertain environment, owners are postponing any capital projects that are not essential to the operation of the firm," said Dunkelberg. 

The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months lost one point, falling to a net-negative 11 percent.   Unadjusted, 26 percent of all owners reported higher sales, and 31 percent reported lower sales.

Small business owners continued to liquidate inventories and plans to replace stocks are weak, though improved.