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ONE COUNTRY
TWO 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
PercentofFirms
“NO” for 20 Quarters
“Not a Good” Time to Expand
DUE TO ________
0
10
20
30
40
50
60
70
80
90
'01 '04 '07 '10 '13
PercentofFirms
Political Economic Costs
As Pct. Saying “Not a Good Time”
Source: NFIB Research Foundation
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.]
PercentofFirms
Recession Ends
Source: NFIB Research Foundation
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
PercentofFirms
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
PercentofFirms
Source: NFIB Research Foundation
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
PercentofFirms
Source: NFIB Research Foundation
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
PercentofFirms
Pct. Increase Minus
Percent Decrease
Source: NFIB Research Foundation
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
PercentofFirms
Inflation Credit/Interest
Source: NFIB Research Foundation
Single Most Important Small Business Problem:
2000 – 2013 (monthly)
Source: NFIB Research Foundation
Most Important Problems
Prob.
Rank Problem – Aug. 2012
1.
2.
3.
4.
5.
6.
14.
26.
32.
56.
Rising Health Care Costs
Uncertainty Over Economic Conditions
Energy Costs
Uncertainty Over Government Actions
Cost of Regulations and Red Tape
Taxes on Business Income
Poor Earnings
Poor Sales
Locating Qualified Employees
Securing Long Term Financing
Regular Borrowing Activity
(At Least Once a Quarter)
Source: NFIB Research Foundation
Loan Demand Weakens Through
the Recession
35
40
45
50
55
PercentofFirms
Recession Starts
Source: NFIB Research Foundation
Pct. – Not Wanting a Loan
Business Loans (Origination) under $1 Million
from 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 Credit
Applicants and Non-Applicants; 2009 – 2011
Variables B S.E. Wald df Sig. Exp(B)
 
New Bus.  (< 4 yrs.)
Employees (log)
Construction 
Professional Services
Owner Sex - Male
Unencumbered RE
Second Mortgage(s)
“Under Water” RE
Credit 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
12.425
50.441
3.957
1.616
14.362
43.736
2.567
11.513
17.105
.046
1.512
7.457
1
1
1
1
1
1
1
1
1
1
1
1
.000
.000
.047
.204
.000
.000
.109
.001
.000
.830
.219
.006
.598
.671
.735
1.160
1.467
1.472
.830
.645
1.007
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)
Construction
Professional Services
Owner Sex - Male
Unencumbered RE
Second Mortgage(s)
“Under Water” RE
Credit 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
.287
2.311
.477
10.839
16.015
12.714
38.568
15.011
8.480
2.715
1
1
1
1
1
1
1
1
1
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
Accepted
Rejected
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-Borrower
Discouraged
     Borrower
84%
16
84%
16
89%
11
85%
15
N 229 544 170 943
Source: NFIB Research Foundation
Small-Employer-Owned Real Estate by Selected
Real 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
 
Own
1st
 Mortgage
2nd
 Mortgage
Upside-Down
Mort. For
   Bus. Purposes
Used 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.
1
Businesses operating primarily from the home are included in residential only.
2
As a percentage of the small employer population.
3
As a percentage of small employers owning that type of real estate.
4
As 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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A Bifurcated Economy

  • 1. ONE COUNTRY TWO ECONOMIES Bill Dunkelberg, Chief Economist – NFIB William J. Dennis, Jr., Pinch Hitter – NFIB Richmond Fed Credit Markets Symposium April, 2013 Charlotte, NC
  • 2. 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
  • 3. Small Business Optimism Index (Quarterly, 1986 = 100) 80 85 90 95 100 105 110 Seasonally Adjusted Source: NFIB Research Foundation
  • 5. 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 PercentofFirms “NO” for 20 Quarters
  • 6. “Not a Good” Time to Expand DUE TO ________ 0 10 20 30 40 50 60 70 80 90 '01 '04 '07 '10 '13 PercentofFirms Political Economic Costs As Pct. Saying “Not a Good Time” Source: NFIB Research Foundation
  • 7. 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.] PercentofFirms Recession Ends Source: NFIB Research Foundation
  • 8. 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 PercentofFirms
  • 9. 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 PercentofFirms Source: NFIB Research Foundation
  • 10. 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 PercentofFirms Source: NFIB Research Foundation
  • 11. 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
  • 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 PercentofFirms Pct. Increase Minus Percent Decrease Source: NFIB Research Foundation
  • 13. Tepid Small Business Recovery A Function of: ? 1.Credit Supply 2.Credit Demand 3.Both 4.Neither
  • 14. 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 PercentofFirms Inflation Credit/Interest Source: NFIB Research Foundation
  • 15. Single Most Important Small Business Problem: 2000 – 2013 (monthly) Source: NFIB Research Foundation
  • 16. Most Important Problems Prob. Rank Problem – Aug. 2012 1. 2. 3. 4. 5. 6. 14. 26. 32. 56. Rising Health Care Costs Uncertainty Over Economic Conditions Energy Costs Uncertainty Over Government Actions Cost of Regulations and Red Tape Taxes on Business Income Poor Earnings Poor Sales Locating Qualified Employees Securing Long Term Financing
  • 17. Regular Borrowing Activity (At Least Once a Quarter) Source: NFIB Research Foundation
  • 18. Loan Demand Weakens Through the Recession 35 40 45 50 55 PercentofFirms Recession Starts Source: NFIB Research Foundation Pct. – Not Wanting a Loan
  • 19. Business Loans (Origination) under $1 Million from Commercial Banks: 1996 – 2011* Source: Community Reinvestment Act data, Federal Financial Examination Council *Represents approximately 80 percent of such loans.
  • 20. Outstanding Small C&I and RE Loans by Number and Dollar Volume: 1995-2012(p) Source: Call Reports, FDIC
  • 21. More/Less in Competition for Small Businesses Banking Business Source: NFIB Research Foundation Selected Year
  • 22. Logistic Regression Results Contrasting Credit Applicants and Non-Applicants; 2009 – 2011 Variables B S.E. Wald df Sig. Exp(B)   New Bus.  (< 4 yrs.) Employees (log) Construction  Professional Services Owner Sex - Male Unencumbered RE Second Mortgage(s) “Under Water” RE Credit 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 12.425 50.441 3.957 1.616 14.362 43.736 2.567 11.513 17.105 .046 1.512 7.457 1 1 1 1 1 1 1 1 1 1 1 1 .000 .000 .047 .204 .000 .000 .109 .001 .000 .830 .219 .006 .598 .671 .735 1.160 1.467 1.472 .830 .645 1.007 1.020 .942 .659 Applicant = 0, Non = 1; n = 2107; -2 Log likelihood = 2701.967; Cox &Snell R2 = .084; Nagelkerke R2 = .115
  • 23. 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) Construction Professional Services Owner Sex - Male Unencumbered RE Second Mortgage(s) “Under Water” RE Credit 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 .287 2.311 .477 10.839 16.015 12.714 38.568 15.011 8.480 2.715 1 1 1 1 1 1 1 1 1 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
  • 24. 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 Accepted Rejected 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-Borrower Discouraged      Borrower 84% 16 84% 16 89% 11 85% 15 N 229 544 170 943 Source: NFIB Research Foundation
  • 25. Small-Employer-Owned Real Estate by Selected Real 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   Own 1st  Mortgage 2nd  Mortgage Upside-Down Mort. For    Bus. Purposes Used 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. 1 Businesses operating primarily from the home are included in residential only. 2 As a percentage of the small employer population. 3 As a percentage of small employers owning that type of real estate. 4 As a percentage of small employers with that type of real estate mortgaged.
  • 26. 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.