DENNIS, WILLIAM April 0711

Small Business Conditions and Their Tie to Credit Markets William J. Dennis, Jr. NFIB Research Foundation GIC Conference Rome, Italy April 7, 2011

Principal Data Sources • Small Business Economic Trends – monthly since 1986 – quarterly since 1973 – from NFIB membership

• Small Business Access to Credit – 2009 and 2010 – from D&B files

• www.nfib.com/research

Small Business Optimism Index (Recovery from NBER Trough) 2009:Q2

2001:Q4

1991:Q1

1982:Q4

1975:Q1

110 105

Index

100 95 90 85 80

Trough

Year 1

Year 2

Year 3

Actual Earnings Changes Last Three Months Compared to the Prior Three January Quarter 1974 to January Quarter 2011

0 -10 -20

rcn etP N

-30 -40 -50 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 YEAR

Current Job Openings Percent With Positions Not Able to Fill Right Now January Quarter 1974 to January Quarter 2011

Outlook for Expansion Percent Next Three Months “Good Time to Expand” January Quarter 1974 to January Quarter 2011

Actual Prices Actual Last Three Months January Quarter 1974 to January Quarter 2011

The Central Issue?

Tight Credit Markets or Poor Sales and Weak Credit Demand

Actual Sales Changes Last Three Months Compared to Prior Three January 1974 to January 2011 30 20 10 0

rcn tP e N

-10 -20 -30 -40 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 YEAR

Ratio of Satisfied to Unsatisfied Small Business Borrowers 12 10

Actual (red)

8 6

Moving Average (black) 4 2 0

06:1

07:12

09:6 Year: Month

11:2

Single Most Important Problem Sales and Finance/Interest Rates January Quarter 1974 to January Quarter 2011

Success Obtaining Credit: Those Attempting to Borrow and Not Success Obtaining Credit

2009 Try to Borrow

2009 All Firms

2010 Try to Borrow

2010 All Firms

All credit wanted Most credit wanted Some credit wanted No credit wanted DK/Refused Total

40% 10 21 23 5 100%

22% 6 12 13 3 55%

41% 19 18 16 6 100%

20% 9 9 8 3 48%

Did Not Try Didn’t want to borrow Discouraged borrower DK/Refused Total

Total

88% 11 1 100%

Did Not Try 39 5 * 45%

100%

81% 15 4 100%

42% 8 2 52%

100%

Predictors of Borrowing Success • • • • • • • • •

Better credit scores Fewer credit types currently in use Fewer purposes for which credit is to be used Fewer mortgages outstanding Employment growth over the last three years More properties owned free and clear Not located in housing bubble states Not patrons of $100 billion+ bank Not in Professional, Tech. or Scientific Servs.

Small Business Credit Access by Size of Principal Bank Patronized and Year 100% 80% 60%

All Most Some None N/A

40% 20% 0% Largest Smallest Banks Banks 2009

Largest Smallest Banks Banks 2010

Types of Real Estate Small Employers Own 100% Home-Based Businesses

80% 60% Five +

40% 2 to 4

20% One Only

0% Residence

2nd Residence

Business

Investment

Real Estate Owned by Small Employers, Its Financing, and Business Use - 2010 Characteristic Own (at least one property) 1st Mortgage 2nd Mortgage Upside-Down Mortgaged for Bus. Purposes Collateralized

Summary

If at Least If at Least One Owned One Mort.

95% 68 17 8

71% 18 9

25% 12

17 11

18 11

21 16

Starts and Terminations of Employer Businesses 700

Thousands

650 600 550 500 Starts

Terminations

450

Source: Office of Advocacy, SBA

20 10

20 00

19 90

400

Conclusion • Small business economic conditions remain weak.

• The small business sector has lagged in the recovery.

• Sales, not credit, has been and remains the issue for most small businesses.

• Ownership of significant real estate assets continues to be a drag on the small business sector and will for a time.