Small business optimism took another dive in April, falling 5.5 points to 90.9, with owners expressing certainty the economy will weaken in the near-term, but expecting it to improve over the next six months. The Optimism Index has fallen 13.6 points over the last two months, with nine of 10 Index components declining in April and one improving.

“The impact from this pandemic, including government stay-at-home orders and mandated non-essential business closures has had a devasting impact on the small business economy,” said NFIB Chief Economist William Dunkelberg. “Owners are starting to benefit from the PPP and EIDL small business loan programs as they try to reopen and keep employees on staff. Small business owners need more flexibility, though, in using the PPP loan to support business operations and liability protection so that all these efforts to support small businesses are not ultimately lost in costly litigation.”

Spotlighting small business owners’ need for more flexibility is that real sales expectations in the next six months declined 30 points to a net negative 42 percent, the lowest reading in the survey’s 46-year history. The second-lowest reading was net negative 24 percent in April 1980. A net negative 11 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 19 points from March.

The NFIB Uncertainty Index fell 17 points in March to 75, with most owners quite certain that the economy will weaken in the near-term. However, reports of expected better business conditions in the next six months increased 24 points, rebounding from a 17-point decline in March. Owners’ optimism about future conditions indicates they expect the recession to be short-lived.

Other key findings from April’s Optimism Index included:

- Earnings trends declined 14 points to a net negative 20 percent. Among owners reporting weaker profits, 39 percent blamed weak sales, 16 percent blamed usual seasonal change, six percent cited price changes, four percent cited labor costs, and two percent cited materials costs. For owners reporting higher profits, 63 percent credited sales volumes and 17 percent credited usual seasonal change.
- The percent of owners thinking it’s a good time to expand lost 10 points falling to three percent, its lowest level since March 2010.

As reported in last week’s NFIB’s monthly jobs report, job creation plans fell eight points to a net one percent, the lowest level since December 2012. Three times as many owners reduced employment as reported an increase in their workforce. Forty-seven percent reported hiring or trying to hire (down seven points), but 41 percent (87 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill. Twenty-four percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 11 points.

The frequency of reports of positive profit trends fell two points to a net negative 6% reporting quarter-on-quarter profits. Among the owners reporting weaker profits, 32% blamed weaker sales, 26% blamed usual seasonal change, 9% cited price changes, 7% cited labor costs, and 7% cited material costs. For those reporting higher profits, 53% credited sales volumes and 22% credited usual seasonal change.

NFIB released surveys in March on how COVID-19 is impacting small businesses. The latest survey showed 92% of small employers are negatively impacted by the outbreak and about half of small employers said they can survive for no more than two months under the current business conditions.

“The full force of the “recession” has not yet been felt as programs such as PPP encourage firms to maintain employment even as the government shutdown reduces business activity,” said Dunkelberg. “A large percentage of the unemployed expect to be rehired as the economy opens back up, but the picture is further confused by unemployment benefits that for many exceed previous pay. Small business owners are starting to rehire laid-off employees as states lift business restrictions and small business loans are hitting bank accounts.”

LABOR MARKETS
Job creation plans fell for a second straight month as the government ordered shutdown took hold. A seasonally-adjusted net 1 percent plan to create new jobs, down 8 points. Not seasonally adjusted, 18 percent plan to increase total employment at their firm (down 5 points) and 9 percent plan reductions (up 3 points). Forty-seven percent reported hiring or trying to hire (down 7 points), but 41 percent (87 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill. The shutdown in industries like construction, agriculture and transportation have had less impact than in services such as restaurants and retail. Twenty-four percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 11 points. A third of all firms with job openings are in construction, 17 percent in non-professional services, and 12 percent in manufacturing and in retail.

CAPITAL SPENDING
Fifty-three percent reported capital outlays, down 7 points from March’s reading. Of those making expenditures, 36 percent reported spending on new equipment (down 7 points), 21 percent acquired vehicles (down 5 points), and 13 percent improved or expanded facilities (down 3 points). Five percent acquired new buildings or land for expansion (down 1 point), and 10 percent spent money for new fixtures and furniture (down 2 points). Eighteen percent plan capital outlays in the next few months, down 3 points from March. The ability to undertake capital projects has been stymied by the government regulations on social distancing and the stay-at-home “mandate” for most workers. Equipment can be ordered, but not always installed or delivered.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 16 percent reported raising compensation (down 15 points) and a net 7 percent plan to do so in the coming months, down 9 points from March. Eight percent cited labor costs as their top problem up from 7 in March. Fifteen percent of the owners selected “finding qualified labor” as their top business problem, 30 percent in construction. The percent reporting higher labor compensation fell from 33 percent in March to a net 17 percent in April. The frequency of reports of positive profit trends fell 14 points to a net negative 20 percent reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 39 percent blamed weak sales, 16 percent blamed usual seasonal change, 6 percent cited price changes, 4 percent cited labor costs, and 2 percent cited materials costs. For owners reporting higher profits, 63 percent credited sales volumes and 17 percent credited usual seasonal change.

CREDIT MARKETS
Five percent of owners reported that all their borrowing needs were not satisfied, up 2 points. Twenty-nine percent reported all credit needs met (unchanged) and 56 percent said they were not interested in a loan (up 1 point). A net 4 percent reported their last loan was harder to get than in previous attempts (unchanged). Two percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was negative 11 percent, down 16 points. Twenty-nine percent of all owners reported borrowing on a regular basis (up 3 points).

SALES AND INVENTORIES
A net negative 11 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 19 points from March. The decline in retail sales was a record and the worst is likely yet to come in May unless the reopening of the economy is pervasive and not delayed. The net percent of owners expecting higher real sales volumes fell 30 points to a net negative 42 percent of owners. In the past two months, the net percent of owners expecting higher sales volumes has declined 61 points. The net percent of owners reporting inventory increases fell 11 points to a net 11 percent. The net percent of owners viewing current inventory stocks as “too low” decreased to negative 7 percent, a 5point decrease from March. With no clear idea about when sales might normalize and the shutdown lifted, existing inventories might be more than sufficient for the near-term and appear excessive with lower sales expected. The net percent of owners planning to expand inventory holdings decreased from March by 1 point to a net negative 4 percent.

INFLATION
The net percent of owners raising average selling prices fell 24 points to a net negative 18 percent, seasonally adjusted. Unadjusted, 24 percent (up 11 points) reported lower average selling prices and 9 percent (down 12 points) reported higher average prices. Price hikes were most frequent in retail (21 percent higher, 10 percent lower) and wholesale (18 percent higher, 13 percent lower). Seasonally adjusted, a net negative 3 percent plan price hikes (down 15 points).

COMMENTARY
A record unemployment rate of 14.7 percent was accompanied by a stock market gain of about 1.5 percent, indicating that investors are optimistic about the future of our economy. About 80 percent (16 million) of the unemployed share that optimism, expecting to be rehired as the economy opens back up, being on temporary layoff. The picture is further confused by unemployment benefits that for many exceed previous pay. Small business owners are starting to rehire laidoff employees as states lift business restrictions and small business loans are hitting bank accounts. The recession that we are experiencing was created by government policy implemented to combat the Covid-19 virus spreading, not by the private sector gone astray as it was in 2008. Although details vary by state, consumers were told to “shelter-in-place” and not go out unless necessary. Many firms were required to close, insuring “social distancing” to contain the virus outbreak from spreading further into society.

For Main Street, the regulations eliminated customers and revenue, forcing massive layoffs and increasing business failures. For many workers, income vanished and there was little reserve to pay bills. Others are receiving pay under various programs, including federal stimulus checks to millions of people.

The reopening required to revitalize the economy will likely be slow and uneven with continued efforts to contain the virus, protect employees, and build back consumer confidence. Owners are starting to benefit from the two targeted small business loan programs, the PPP and EIDL. Loans are being deposited into small business bank accounts providing desperately needed financial relief for many. These loans will help in their effort to reopen and keep employees on staff. Additional help though is required. Small business owners need more flexibility in using the PPP loan to support business operations and liability protection so that all these efforts to support small businesses are not ultimately lost in costly litigation.

Fighting the spread of Covid-19 with isolation policies is exceptionally costly economically as the data show. Consumers must feel “safe” before they come back out with their wallets. The sooner that happens the faster the economy will recover.