The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8.  The persistence of index readings below 90 is unprecedented in survey history.

“The March reading is very low and headed in the wrong direction,” said NFIB chief economist Bill Dunkelberg. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”

The index has posted 18 consecutive monthly readings below 90.  In March, nine of the 10 Index components fell or were unchanged from February’s not-so-great readings.

After a devastating period of employment reductions, employment change per firm hit the “zero line” in March. Since July 2008, employment per firm fell steadily each quarter, logging the largest reductions in survey history (35 years). The February reduction of just 0.1 per firm indicated a substantial slowdown in the bleeding, and the March reading of 0.0 confirms that workforce reductions have ended.

While actual job reductions may have halted, plans to create new jobs remain weak. Over the next three months, 7 percent plan to reduce employment (down one point), and 15 percent plan to create new jobs (up two points), yielding a seasonally adjusted net negative 2 percent of owners planning to create new jobs, weaker than February and still more firms planning to cut jobs than planning to add. Only 9 percent (seasonally adjusted) reported unfilled job openings, down two points and historically low, showing little hope for a lower unemployment rate.

The frequency of reported capital outlays over the past six months fell two points to 45 percent of all firms, one point above the 35-year record low reached most recently in December 2009. Of those making expenditures, 30 percent reported spending on new equipment (down one point from February), 16 percent acquired vehicles (down three points), and 8 percent improved or expanded facilities (down two points). Four percent acquired new buildings or land for expansion (unchanged), and 9 percent spent money for new fixtures and furniture (up one point). Plans to make capital expenditures over the next few months fell one point to 19 percent, three points above the 35-year record low. 

Two percent characterized the current period as a good time to expand facilities, down two points from February. A net negative 8 percent expect business conditions to improve over the next six months, up a point from February, but 9 points below January and a very pessimistic reading. 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved 1 point to a net negative 25 percent. Widespread price cutting continued to contribute to reports of lower nominal sales. The net percent of owners expecting real sales gains lost three points, falling to a net negative 3 percent of all owners, seasonally adjusted.

Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. A net negative 18 percent of all owners reported gains in inventories (more firms cut stocks than added to them, seasonally adjusted), 10 points better than December’s record reading but unchanged from February. 

For all firms, a net negative 1 percent (unchanged) reported stocks too low, so it appears that stocks are considered to be roughly in balance relative to expected real sales volumes. Plans to add to inventories were unchanged at a negative 7 percent of all firms (seasonally adjusted) – still more owners planning to reduce stocks than planning new orders.  Only a pick-up in sales will turn this around.  Seasonally unadjusted, 13 percent plan to add to stocks while 15 percent will reduce them. 

The weak economy continued to put downward pressure on prices. Eleven percent of the owners reported raising average selling prices, but 29 percent reported average price reductions. On the cost side, 5 percent of owners cited inflation as their No. 1 problem (e.g., costs coming in the back door of the business), so materials costs are not pressuring owners too badly. 

In March, earnings trends declined with a net negative 43 percent of owners reporting positive profit trends. The persistence of this imbalance is bad news for the small business community.  Profits are important for the support of capital spending.  Not seasonally adjusted, 9 percent reported profits higher (down 3 points), but 58 percent reported profits falling (up three points).

Regular NFIB borrowers (35 percent accessing capital markets at least once a quarter) continued to report difficulties in arranging credit.  A net 15 percent reported loans harder to get than in their last attempt, up three points from February.  However, 89 percent of the owners reported all their credit needs met or they did not want to borrow. 

Historically weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory that requires businesses to take out the usual loans used to support these activities. 

“What small businesses need most are increased sales, giving them a reason to hire and make capital expenditures and borrow to support those activities,” said Dunkelberg.

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