The recent reports of record bonuses on Wall Street have Main Street citizens dumbfounded as to the current economic situation.
What did Main Street get out of the bailouts? What has changed from a year ago? With unemployment at 10% and a record wealth gap the skepticism regarding the stock market rally and the economic recovery increases with every day. The job market is actually still worsening, consumer credit conditions have worsened and small businesses are struggling more than ever.
A recent report from the NFIB on small businesses confirms many of the underlying concerns about the economic recovery. Chief among these problems is the weakness in the credit markets and the continued weakness in sales growth. The latest survey of small businesses showed slight improvement in business optimism which bottomed in March 2009, though 32% of respondents continue to be concerned about the rebound in sales. The NFIB reports:
The Index of Small Business Optimism gained 0.2 points, rising to 88.8 (1986=100), 7.8 points higher than the survey’s second lowest reading reached in March 2009. The gain was minor, so the good news is still that the Index did not decline. But all in all, the gain is less than was hoped for. Four of the ten Index components posted gains, two were unchanged, and four declined. The biggest problem continues to be poor sales, as 32% said “weak sales” was their top business problem.
Respondents reported the 6th worst reading in the 35 year history of the report as employment trends showed no change since July. Over the next three months, 16% plan to cut more jobs while just 7% plan to increase employment. Using the average pace of historical recoveries, economists believe we will not recovery the lost jobs from the current recession until 2016.
The profit outlook for small firms remains equally bleak as credit markets remain tight and sales fail to rebound. Capital spending expansion fell slightly to 44% of all firms. The net percentage of small business owners reporting higher sales remained near all-time lows at -26%.
The lack of demand is reducing the pricing power for small businesses and compounding the profit problems:
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. Not seasonally adjusted, 14% reported profits higher (down two points), but 50% reported profits falling (unchanged). Weak sales and price cuts are responsible for much of the weakness in profits.
These problems have continued to result in weak credit conditions:
33% reported regular borrowing, typical of the post-1983 period, down a point from July. Overall, loan demand remains weak due to widespread postponement of investment in inventories and record low plans for capital spending. In addition, the continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers.
The survey shows, that while much of the economic rebound is showing up in the banks and the larger firms it is still far from reality on Main Street. The NFIB’s commentary is surprisingly realistic with regards to the real state of the economy, the recovery and the potential of more wasteful government spending, i.e., devalue taxpayer’s dollars:
Although third quarter real Gross Domestic Product growth will likely be over 3% (a stunning improvement from the 6% shrinkage in the first quarter) the surge has not shown up on Main Street as of yet. Reported capital spending was at a survey-low level (started in 1973). More firms plan more inventory reductions than plan to invest, and more owners plan to trim their workforce than plan to increase employment. Quarterly reports on sales reveal 41% experiencing declines compared to 21% reporting quarterly gains. Quarterly profit trends are the worse in survey history, with 50% reporting declines compared to 14% reporting gains.
And, owners are not looking for a lot of improvement. About 40% expect real sales volumes to decline in the coming months in contrast to about 25% expecting gains. Only 7% think the current period is a good time to expand, near the survey low. Credit markets are expected to remain difficult for those wanting to borrow, but with inventory investment and capital spending plans near historic lows, it is clear that loan demand (not the supply of credit) is weak. Legislative activities in Washington undoubtedly dampen the outlook with talk about health care mandates, cap and trade, card check, and new taxes on all sorts of goods and services. Many will wonder if it is worth the effort to try to grow the firm.
Now, some in Congress are considering "Stimulus II," which may take the form of a jobs tax credit similar to that enacted in 1976-77. Some feel this was a successful program, creating new jobs. But it is likely that "government job creation" is an oxymoron. Such a program does not pass a simple "smell test" of logic. Even a minimum wage worker costs about $20,000 (all in). For example, who would spend $20,000 to get a $5,000 credit if there were no use for the worker (e.g. the worker could not generate more than $15,000 in revenue to cover the cost of hiring). Firms will not hire people to just stand around, and cannot pay workers more than the revenue they generate for the firm. With weak consumer demand, more workers are apparently not needed and owners are not hiring. A jobs credit will not bring in more sales.
Such a program, if passed, would be the “cash for clunkers” program for the job market. Hiring might be delayed in anticipation of the program if it is proposed in Congress and debated for a period of time and, unless prevented, might induce some firms to release workers and re-hire them as “new.” Such a program will involve red tape and complex formulas to compute credits, and most if not all of the money will be paid for workers that would be hired anyway. All this would not induce many consumers to increase their spending, the top need identified by business owners. Labor is cheap; customers are needed. Maybe giving the money to consumers would be simpler. When consumer spending picks up, firms will have reason to hire.
The NFIB aren’t the only ones reporting the extreme weakness on Main Street and at small businesses. Meredith Whitney recently discussed the issues at smaller firms:
“With the exception of large-cap companies, smaller-sized businesses are struggling to raise capital and the wider implications for the economy are bearish. Small companies employ 50% of the U.S. workforce and contribute 38% to GDP, or Gross Domestic Product.
“Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year. I believe that we are only in the early stages of the second half of this credit cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010.”
Second half of the credit crisis is absolutely correct. We may very well be past the panic portion of the deleveraging cycle, but the long-term problems in the small business community and in the job market are structural problems that will take years to be resolved. Anyone expecting a quick recovery (despite how irrational equity market participants react in the short-term) is likely to be disappointed.
