Small Business Problems Persist as Profits Stall

Washington, DC, July 14, 2009--The current recession has been harder on small business profits than any other time in the past 35 years, according to the National Federation of Independent Business.

And the profit problems persist. NFIB's Small Business Optimism Index, to which the earnings measure significantly contributes, slipped again last month after a marginal improvement in the previous two months.

In June, the Index lost a point, falling to 87.9 (1986=100).[1]

Reports of positive profit trends continue at record lows, with a net-negative 42 percent of small business owners reporting increased earnings. Of the 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 materials costs and higher selling prices.

For 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 cited higher materials costs and 2 percent each blamed higher insurance costs, higher regulatory costs, rising labor costs and credit costs. Weak sales and price cuts are responsible for much of the weakness in profits. Rising labor costs are not an issue.

“When profits are bad, like now, small business owners cannot reinvest, except to replace things,” said Dunkelberg. 

Plans to make capital expenditures fell again to 17 percent, continuing a run of historically low readings. One consequence of this has been a huge reduction in inventories, with record numbers of firms reducing their inventories to line up stock with lower customer spending.

A major cost-cutting activity has been focused on one of the largest costs – labor. Over the past six months, owners have reduced employment at a record pace.

Thirty percent of owners reported regular borrowing, a historically low figure, but only a few points below the 20-year average. Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending.