A Bifurcated Economy

ONE COUNTRYTWO ECONOMIES

Bill Dunkelberg, Chief Economist – NFIB

William J. Dennis, Jr., Pinch Hitter – NFIB

Richmond Fed Credit Markets Symposium

April, 2013

Charlotte, NC

A Bifurcated Economy

GDP Growth Tepid while

Stock Market near Record High

Corporate Profits near Record High

Unemployment Rate at 7.6%

[ 0% + 4%] / 2 = 2% Growth

Small Business Optimism Index(Quarterly, 1986 = 100)

80

85

90

95

100

105

110

Seasonally Adjusted

Source: NFIB Research Foundation

Small Business Economic Trends

Outlook for Business Expansion(Pct. “Now Is a Good Time”)

0

5

10

15

20

25

30

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

Perc

ent

of F

irms

“NO” for 20 Quarters

“Not a Good” Time to ExpandDUE TO ________

0102030405060708090

'01 '04 '07 '10 '13

Perc

ent

of F

irm

s

Political Economic Costs

As Pct. Saying “Not a Good Time”


Reported Change in Past Sales (Last Three Months vs. Prior Three)

-40

-30

-20

-10

0

10

20

30

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

[Pct. "Higher" - Pct. "Lower", Seas. Adj.]

Perc

ent

of F

irms

Recession Ends


Earnings Trends - Pct. “Higher” – Pct. “Lower”

-50

-40

-30

-20

-10

0

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

Perc

ent

of

Firm

s

Planned Capital Outlays(Next Three to Six Months)

15

20

25

30

35

40

45

77 80 83 86 89 92 95 98 '01 '04 '07 '10 '13

Perc

ent

of F

irm

s


INVENTORY INVESTMENT PLANS[% PLAN INCREASE – % PLAN DECREASE]

-15

-10

-5

0

5

10

15

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

Perc

ent

of F

irm

s


Job Openings -(Pct. with at Least One Unfilled Opening)

5

10

15

20

25

30

35

40

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

Net Percent Raising Prices

-40

-20

0

20

40

60

80

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

Perc

ent

ofFi

rms

Pct. Increase Minus Percent Decrease


Tepid Small Business Recovery

A Function of: ?

1.Credit Supply

2.Credit Demand

3.Both

4.Neither

Single Most Important Problem

0

5

10

15

20

25

30

35

40

45

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

Perc

ent

of F

irm

s Inflation Credit/Interest


Single Most Important Small Business Problem:

2000 – 2013 (monthly)


Most Important ProblemsProb.Rank Problem – Aug. 2012

1.2.3.4.5.6.14.26.32.56.

Rising Health Care CostsUncertainty Over Economic ConditionsEnergy CostsUncertainty Over Government ActionsCost of Regulations and Red TapeTaxes on Business IncomePoor EarningsPoor SalesLocating Qualified EmployeesSecuring Long Term Financing

Regular Borrowing Activity(At Least Once a Quarter)


Loan Demand Weakens Through the Recession

35

40

45

50

55

Percent of Firms

Recession Starts


Pct. – Not Wanting a Loan

Business Loans (Origination) under $1 Millionfrom Commercial Banks: 1996 – 2011*

Source: Community Reinvestment Act data, Federal Financial Examination Council

*Represents approximately 80 percent of such loans.

Outstanding Small C&I and RE Loans by Number and Dollar Volume: 1995-2012(p)

Source: Call Reports, FDIC

More/Less in Competition for Small Businesses Banking Business

Source: NFIB Research Foundation Selected Year

Logistic Regression Results Contrasting CreditApplicants and Non-Applicants; 2009 – 2011

Variables B S.E. Wald df Sig. Exp(B)

New Bus. (< 4 yrs.)Employees (log)Construction Professional ServicesOwner Sex - Male

Unencumbered RESecond Mortgage(s)“Under Water” RECredit Score

Big Bank Customer State RE Economy Constant

-.514 -.399 -.308 .148 .383

.387 -.186 -.439 .007

.020

-.060

-.417

.146

.056

.155

.116

.101

.058

.116

.129

.002

.094

.049

.153

12.42550.441 3.957 1.616 14.362

43.736 2.56711.51317.105

.046

1.512

7.457

11111 1111

1 1 1

.000

.000 .047 .204.000

.000 .109 .001.000

.830

.219

.006

.598 .671 .7351.1601.467

1.472 .830 .6451.007

1.020

.942

.659

Applicant = 0, Non = 1; n = 2107; -2 Log likelihood = 2701.967; Cox &Snell R2 = .084; Nagelkerke R2 = .115

Logistic Regression Results Contrasting Accepted and Rejected Borrowers; 2009 – 2011

Variables B S.E. Wald df Sig. Exp(B)

New Bus. (< 4 yrs.)Employees (log)ConstructionProfessional ServicesOwner Sex - Male

Unencumbered RESecond Mortgage(s)“Under Water” RECredit Score Big Bank Customer State RE Economy Constant

-.095 .066 .372-.257 .107

.328 -.597 -.560 .014

-.517

.204

-.347

.178 .068 .210.169.155

.099 .149 .157.002

.134

.070

.211

.287 .945 .2872.311 .477

10.839 16.015 12.714 38.568

15.011

8.480

2.715

11111 1111

1 1

1

.592.331 .076 .128 .490

.001 .000 .000.000

.000

.004

.099

.909

1.069 1.451 .773 1.113

1.388

.550 .571 1.014

.596

1.227

.707

Accept = 1, Reject = 0; n = 1231; - 2 Log likelihood = 1344.014; Cox &Snell R2 = .144; Nagelkerke R2 = .193

Credit Approval and Discouraged Borrowers in States Grouped by Residential Mortgages

with Negative Equity

Credit Approval High Negative Eq. Med. Negative Eq.

Low Negative Eq. All States

AcceptedRejected

43%57

59%41

63%37

56%44

N 321 840 249 1410

Not Borrowing High Negative Eq. Med. Negative Eq.

Low Negative Eq. All States

Non-BorrowerDiscouraged Borrower

84%

16

84%

16

89%

11

85%

15

N 229 544 170 943


Small-Employer-Owned Real Estate by SelectedReal Estate Finance Characteristics – 2010

Residential Business1 Investment All Real Estate

Characteristic Total2 Own3 Mort.4 Total2 Own3 Mort.4 Total2 Own3 Mort.4 Total2 Own3 Mort.4

Own1st Mortgage2nd MortgageUpside-DownMort. For Bus. PurposesUsed as Collateral

94% 61 65% 16 17 26% 6 7 10 15 16 24 7 7 11

36% 19 63% 1 4 7 % 1 4 6 2 9 20 4 19 30

37% 18 49% 2 5 9% 3 8 15 2 5 9 2 6 12

95% 68 71% 17 18 25% 8 9 12 17 18 21 11 11 16

N

734 693 457

734 324 198

734 310 166

734 708 537

Source : “Small Business and Credit Access,” NFIB Research Foundation, January 2011. 1Businesses operating primarily from the home are included in residential only.2As a percentage of the small employer population.3As a percentage of small employers owning that type of real estate.4As a percentage of small employers with that type of real estate mortgaged.

Summary

• Small business is recovering hesitantly.• Great uncertainty exists.• Small business problems associated most often

with uncertainty, taxes, and regulation.• Sales problem remains, but is declining.• Credit has been primarily a demand issue.• Real estate has played an enormous and under-

appreciated role in small business problems.

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