No Recovery for Small U.S. Businesses
Owners of small U.S. businesses are not experiencing an economic rebound. Not by a long shot. They also have little confidence that better times are near. This is in contrast, of course, to both the public equities (i.e. the “stock market”) run that continues unabated and the regular media reports of improvements in the global macroeconomic indicators.
NFIB Survey of Business Owners
“2009 did not end on an uplifting note,” reads the January 2010 Small Business Economic Trends report issued by the Federation of Independent Business (NFIB). In its most recent survey of managers of smaller U.S. businesses (a mean employee count of 13):
- Profits continue to fall. Just 12% of the owners reported higher earnings the past three months (4Q09) compared to the three months prior (3Q09). This despite that 3Q09 was a terrible quarter for earnings.
- Owners reported lower revenue over the past three months and see no increase in revenue in the ensuing three months. The percent of business owners reporting lower sales or the quarter remained near the record low reported in March 2010 and 51 percent of the owners surveyed expect even lower revenue the next three months.
- Capital spending remains at a record low. Just 44% made a capital expenditure in the past six months (lowest level since survey began in 1979) and a mere 18% plan to make one or more in the next three to six months (just two points above the 35 year low).
- Owners continued to shed inventory and plan to shed more. The inventory index recorded its largest inventory decline since the survey began. Shocking given small businesses have been shedding inventory since mid-2007. Moreover, more reductions can be expected as more owners plan to reduce their inventory levels going forward than plan to increase.
- Owners became more pessimistic in December and overall optimism remained at historic lows. “Optimism has clearly stalled,” said the NFIB. The Index of Small Business Optimism fell in December 2009 to its second lowest reading since 1980 (the lowest was in March 2009).
The Fed’s Beige Book Report
The U.S. Federal Reserve tracks economic activity across a much broader group of indicators and includes data such as consumer spending, tourism and commodity prices. The January 13 Federal Reserve “Beige Book” reports a modest economic recovery throughout the United States. It also found some optimism among manufacturers, in apparent contrast to the recent NFIB report.
The Fed found weakness in the Tenth District which includes Oklahoma. In fact, it reports a slowdown of activity from mid-2009. Consumer spending during the holiday season was not any better in the region than 2008. Furthermore, the rebound in residential real estate “lost some steam,” commercial construction activity weakened further, and “bank loan demand remained sluggish and overall loan quality was poor” in the region.
Lots of Fuel but No Fire
Unfortunately, these reports reflects what I see and feel and hear in my daily work advising owners of private U.S. companies on M&A-related issues. And it’s pretty amazing, and scary, given:
- We are two years into this recession. One would expect inventories would have long ago been reduced to minimum levels, and that profits would begin to rise due to prior cost reductions. (Both of which should stimulate economic growth).
- Interest rates remain at historic lows (an economic stimulus)
- The federal government is spending like mad (an economic stimulus)
- Federal and state taxes remain below historic peek levels (an economic stimulus of sorts)
When will the recovery arrive for owners of small and mid-size U.S. companies? Your guess is as good as mine but, historically, recessions do end and it seems there can be nowhere but up from here. Of course, we’ve been saying this for months and, according to the NFIB and the Fed, we continue to be proven wrong. Finally, given smaller private companies employ a majority of the U.S. labor force, a broad recovery will not occur before private businesses begin growing, spending, hiring and — once again — earning a profit.
Written by David L. Perkins, Jr., Managing Director of Tulsa-based Acquisition Advisors and Managing Editor of The Business Owner Journal.
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