Small Business Owners’ Margins Squeezed, Indicating Recession Possible

Small business optimism has been on the decline for the past 15 months, and March’s reading from the National Federation of Independent Business (NFIB) Small Business Optimism Index piled on more of the same, showing a 0.3-point fall to 92.6.

A majority of the 10 components tracked by the survey decreased, led by a three-point fall for current inventory and current job openings, the NFIB said. Expected credit conditions declined a percentage point in March to a minus 6% reading. Borrowing needs were not satisfied, according to 5% of the owners, which is three points above the record low reached in September 2015.

“A ‘chartist’ looking at the data historically might conclude that the index has clearly hit a top and is flashing a recession signal,” the NFIB said. “The April survey will decide whether or not the alarm should be rung.”

The 7.7-point decrease in the index since December 2014 brought it back to levels typically associated with recessions, “making it one of the more pessimistic monthly business surveys,” in contrast to Institute for Supply Management surveys and regional Federal Reserve manufacturing surveys, which showed slight gains in March, noted Mark Vitner, senior economist with Wells Fargo.

General business conditions in the NFIB index dropped 29 points over the past 15 months, the most of any category, likely indicating business owners’ “scaled back expectations for sales, which have tumbled more than 18 points over this time period,” Vitner said.

Owners also reported ongoing concerns about their lack of pricing power; notably, the net proportion of firms that said they raised prices in March remained at a near-post-recession low of negative four points for the past three months, he said. A lack of pricing power “coincides with rising wages and benefit costs,” Vitner said. Also, the NFIB survey shows a “persistent squeeze on operating margins over the past 15 months,” he said.

“The squeeze on small business profit margins has also coincided with a pullback in capital spending and overall economic growth, which casts some doubt on the turnaround in other monthly surveys and may be a harbinger of slower economic growth this spring,” Vitner said.

- Nicholas Stern, NACM editorial associate

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