Small Business and the Global Economy

DR. WILLIAM DUNKELBERG Chief Economist NATIONAL FEDERATION OF INDEPENDENT BUSINESS

CHAIRMAN, LIBERTY BELL BANK, NEW JERSEY CHAIR, GLOBAL INTERDEPENDENCE CENTER

TWO WAYS OUT, NEITHER DESIRABLE

THE 99 PERCENT

GDP AND EMPLOYMENT GDP2005$(left)

EMPLOYMENT(right)

14000

148000 146000

13000

144000 12000

142000

11000

140000

10000

138000 136000

9000

HUGE EMPLOYMENT GAP

134000

8000

132000

7000

130000 '00

'03

'06

'09

'12

HOUSING STARTS UNITS 2000

UNITS 000

1700 1400 1100 800 500 91

93

95

97

99

'01

'03

'05

'07

'09

'11

HOME OWNERSHIP RATES USA

70

BARNEY’S “UNAFFORDABLE” HOUSING 68

Percent

66

64

62

4 '0

1 '0

9 8

9 5

9 2

8 9

8 6

8 3

8 0

60

CONSUMPTION SHARE OF GDP & CONSUMER SAVING CONSUMPTION SPENDING

SAVING RATE

8

64

6

62

4

60

2

58

0 '0 8

66

'0 3

10

98

68

93

12

88

70

83

14

78

72

“EXCESS” DEBT: PAYING FOR THE “PARTY” DEBT=.7GDP 16000 14000

ACTUAL

MAINTAINING DEBT/GDP RATIO IN 1999

12000 (000)

10000 8000 6000 4000 2000 0

90

93

96

99

'02

'05

'08

'11

TRADE DEFICIT -100 -200 -300

THE PARTY

-400 -500 -600 -700

Source: BEA

'0 8

'0 3

98

93

88

83

-800

78

BILLIONS OF CONSTANT DOLLARS

0

110

INDEX OF CONSUMER SENTIMENT

90 80 70 60

Source: University of Michigan

'0 8

'0 3

98

93

88

83

50

78

Index Value

100

Source: University of Michigan

2008-12

'1 2

'0 9

'0 6

NET % POLICIES ARE GOOD

'0 3

50 40 30 20 10 0 -10 -20 -30 -40 -50

'0 0

Percent of Consumers

RATING OF GOVERNMENT POLICY

HOUSE PRICES FHFA

CASE SHILLER

250

150 100 50

'11

'08

'05

'02

99

96

93

90

0

87

Percent

200

CONSUMER NET WORTH

TRILLIONS OF DOLLARS

NET WORTH 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 78 80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08 '10

SMALL BUSINESS FACTS • 90% OF ALL EMPLOYERS HAVE FEWER THAN 20 EMPLOYEES • 99% HAVE FEWER THAN 500 • PRODUCE HALF OF THE PRIVATE SECTOR GROSS DOMESTIC PRODUCT • EMPLOY 50%+ OF PRIVATE SECTOR EMPLOYEES • PRODUCE 2/3RDS OF THE NEW JOBS

SMALL BUSINESS OPTIMISM INDEX (QUARTERLY, 1986 = 100) SEASONALLY ADJUSTED

MAY JUNE

110 105 100 95 90 85

FIRST MONTH IN EACH QUARTER

80

76

79

82

85

88

91

94

97

'00

'03

'06

'09

'12

SMALL BUSINESS OPTIMISM INDEX (RECOVERY FROM NBER TROUGH) 2009:Q2

2001:Q4

1991:Q1

1982:Q4

1975:Q1

110 105 100 95 MAY

90 85 SURVEY FIRST MONTH IN EACH QUARTER

80

JUNE

EXPECTATIONS FOR GENERAL BUSINESS CONDITIONS IN 6 MONTHS (PCT “BETTER” - PCT “WORSE”) QUARTERLY

MAY JUNE

50 30 10 -10 -30

SEASONALLY ADJUSTED

'1 2

'0 9

'0 6

'0 3

'0 0

97

94

91

88

85

82

79

-50

76

Percent of Firms

70

OUTLOOK FOR BUSINESS EXPANSION (PCT “NOW IS A GOOD TIME”) QUARTERLY

MAY JUNE

“NO” FOR 18 QUARTERS

25 20 15 10 5

(SEASONALLY ADJUSTED)

'1 2

'0 9

'0 6

'0 3

'0 0

97

94

91

88

85

82

79

0

76

Percent of Firms

30

BAD TIME TO EXPAND DUE TO THE POLITICAL CLIMATE QUARTERLY

MAY JUNE

25 20 15 10 5

(SEASONALLY ADJUSTED)

'1 0

'0 4

'0 7

% OF THOSE SAYING “BAD TIME”

0

'0 1

Percent of Firms

30

REPORTED CHANGE IN PAST SALES (last 3 months vs prior 3) QUARTERLY

MAY JUNE

30

10 0 -10 -20 -30

'1 2

'0 9

'0 6

'0 3

'0 0

97

94

91

88

85

82

79

-40

[% "HIGHER" - % "LOWER", SEAS. ADJ.]

76

Percent of Firms

20

EXPECTED REAL SALES QUARTERLY

MAY JUNE

50

30 20 10 0 -10 -20

'1 2

'0 9

'0 6

'0 3

'0 0

97

94

91

88

82

79

-30

85

[% "HIGHER" - % "LOWER", SEAS. ADJ.]

76

Percent of Firms

40

ACTUAL PRICE INCREASES SEASONALLY ADJUSTED RAISED (NET)

80

FIRST MONTH IN EACH QUARTER

40 20

-40

'1 2

'0 9

'0 6

'0 3

'0 0

94 97

88 91

-20

82 85

0

76 79

Percent of Firms

60

MAY JUNE

EMPLOYMENT CONSTRUCTION RETAIL GOVERNMENT

MANUFACTURING PROF/BUS SERVICES

28000

18000 13000 8000

'1 0

'0 5

'0 0

95

90

85

80

3000

75

Employment

23000

AVERAGE CHANGE IN EMPLOYMENT PER FIRM WORKERS PER FIRM

MAY JUNE

0

-0.4

-0.8 QUARTERLY: FIRST MONTH IN EACH QUARTER

'0 0 '0 3 '0 6 '0 9 '1 2

97

94

91

88

85

82

-1.2

79

NUMBER OF WORKERS

0.4

JOB CREATION PLANS % PLAN INCREASE - % PLAN DECREASE QUARTERLY

MAY JUNE

25

15 10 5 0 -5

12

09

06

03

00

97

94

91

88

85

82

79

-10 76

Percent of Firms

20

REAL INVESTMENT • CREATION OF REAL PRODUCTIVE ASSETS – MAINTENANCE MODE • SOLD OFF EXCESS INVENTORY, NEW ORDERS WEAK • FIRE SALE IS OVER, SATISFIED WITH CURRENT STOCKS • HOUSING: NO HELP FOR PRODUCTIVITY

ACTUAL CAPITAL OUTLAYS % SPENDING

75

%SPEND + LEASE

LEASING ADDED

65 60 55 50 45

FIRST MONTH IN EACH QUARTER+MAY JUNE

2 '1

9 '0

6 '0

3 '0

0 '0

97

94

91

88

85

40

82

Percent of Firms

70

PLANNED CAPITAL OUTLAYS (NEXT SIX MONTHS) QUARTERLY

MAY JUNE

40 35 30 25 20

'0 1 '0 4 '0 7 '1 0

98

95

92

89

86

83

80

15

77

Percent of Firms

45

MOST IMPORTANT PROBLEMS 35

TAXES

REGULATIONS

WEAK SALES

INSURANCE

FIRST MONTH IN EACH QUARTER+MAY JUNE 25 20 15 10 5

94 97 '0 0 '0 3 '0 6 '0 9 '1 2

88 91

82 85

0

76 79

Percent of Firms

30

CREDIT • FEW USES FOR LOANS • PRIVATE LOAN DEMAND WEAK, GOVERNMENT DEMAND STRONG • LOTS OF UNCERTAINTY: RETURNS • PLANNING HORIZONS LONGER THAN 6 MONTHS • TOO MUCH “TEMPORARY” STUFF

SMALL BUSINESS CREDIT PROBLEMS (% HARDER TO GET - % EASIER) MAY JUNE

30 25 20 15

3 '1

0 '1

7 '0

4 '0

1 '0

98

95

92

89

86

83

80

77

10 5 0 -5

74

Percent of Firms

QUARTERLY

LOAN DEMANDS WEAKEN THROUGH THE RECESSION PERCENT OF ALL FIRMS NOT WANTING A LOAN RECESSION STARTS

50

45 40

'1 1

'0 8

'0 5

'0 2

99

96

35

93

Percent of Firms

55

MAY JUNE

SINGLE MOST IMPORTANT PROBLEM FACING OWNERS INFLATION

CREDIT

45

35 30

FIRST MONTH IN EACH QUARTER+MAY JUNE

25 20 15

CREDIT: NO PROBLEM

10 5

'1 2

'0 9

'0 6

'0 3

'0 0

97

94

91

88

85

82

79

0

76

Percent of Firms

40

BANK

BANK ASSETS

LIABILITIES

REQUIRED RESERVE $10

Deposit $100

EXCESS RESERVE $90

ASSETS CASH

$10

LOAN $90

LIABILITIES Deposit $100

Factors Using Reserves on Federal Reserve's Balance Sheet (Liabilities) from 6/27/2007 to 2/15/2012

$3,000 $2,850

Reserve Balances

$2,700 Other Liabilities and Capital

$2,550 $2,400 $2,250

Deposits - Not Reserve Balances

$2,100

Treasury Cash Holdings

$1,950 Reverse-RPs with Dealers

$1,500 $1,350 $1,200 $1,050

Series Break PDCF-3/16/08 TSLF-3/11/08, 950

$1,650

TAF-12/12/07 Series Break "TDWP - 8/17/07"

Billions

$1,800

Reverse RPs: Foreign Official and International Accounts Currency in Circulation TSLF-3/11/08

$900 "TDWP - 8/17/07"

$750 $600

TAF-12/12/07

25-Jan-12 14-Dec-11 2-Nov-11 21-Sep-11 10-Aug-11 29-Jun-11 18-May-11 6-Apr-11 23-Feb-11 12-Jan-11 1-Dec-10 20-Oct-10 8-Sep-10 28-Jul-10 16-Jun-10 5-May-10 24-Mar-10 10-Feb-10 30-Dec-09 18-Nov-09 2009-10-07 2009-08-26 2009-07-15 2009-06-03 2009-04-22 11-Mar-09 28-Jan-09 17-Dec-08 5-Nov-08 24-Sep-08 2-Apr-08 20-Feb-08 9-Jan-08 28-Nov-07 8-Aug-07 27-Jun-07

$450

AVERAGE RATE PAID ON SHORT TERM LOANS RATE PAID

1 YR TREASURY

20 15 10 5

1 '1

8 '0

5 '0

2 '0

99

96

93

90

87

84

0

81

Percent of Firms

25

35

30

Source: BEA

'0 8

'0 3

98

93

88

83

25

78

PERCENT

40

RATIO OF GOVERNMENT SPENDING TO GDP

U.S. Federal Deficit 500

0

-500

CROWDING OUT? -1000

'0 8

'0 5

'0 2

99

96

93

90

87

84

81

78

-1500

SO, WHERE ARE WE? • • • •

ECONOMIC GROWTH SLOW UNEMPLOYMENT HIGH SMALL BUSINESS, HALF OF GDP, STALLED MOST IMPORTANT PROBLEMS? – – – –

HEALTH CARE COST, TOP FOR 25 YEARS UNCERTAINTY ABOUT THE ECONOMY #2 UNCERTAINTY ABOUT GOVERNMENT POLICY #4 ADMINISTRATIVE LAW, EPA, HHS REGS ETC

• CHALLENGES ARE LOCAL, NATIONAL, GLOBAL

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