In a striking illustration of low economic expectations, a July survey of borrowing by small businesses recorded a 20-year low despite the lowest costs in that same time period.
Economist William Dunkelberg, who has conducted the survey since 1973, said it demonstrates once again that rates aren't the only consideration in whether business does or doesn't borrow.The key to understanding, he said, is to be found in the potential payoff, "and there is none."
The quarterly survey, conducted among the more than 600,000 members of the National Federation of Independent Business, showed plans for hiring, inventory additions and capital investments declined from the previous quarter.
The organization's "small business optimism index," made up of 10 items that include the climate for expansion, expected sales volume and current job openings, fell to its ninth lowest of 72 quarterly readings since 1974.
The seasonally adjusted index, based on 1978 equaling 100, fell to 94 in the latest quarterly survey. The all-time low of 81.1 was reached in the second quarter of 1980, but the index rebounded to 95.1 in the following quarter.
More recently, readings of 92.3 and 92.6 were recorded in the final quarter of 1990 and the first quarter of 1991. As recenty as the first quarter of this year, following President Clinton's election, the index stood at 102.1.
Dunkelberg, dean of Temple University's School of Business and Management, commented that "there is little good news for the economy beyond the fact that in spite of all the bad news, the economy keeps growing, if very slowly."
He said the latest readings do not suggest recession. "There is nothing to knock the economy into a downward spiral," he said. They indicate that businesses see little good economic news on the horizon.
"With a major tax hike, more defense cuts, major economic weakness among our trading partners and minimal job growth driving consumption, the prospects for second-half growth are below the 2 percent range," he said.
Ironically, he said, the only stimulus to gross domestic product may be the start of the massive rebuilding of the flood plain, "formerly known as the Midwest."
The disinterest in borrowing by business is matched by a similar reluctance of households to add to debt.
In spite of stable prices, low interest rates and the availability of an assortment of home mortgages, lenders have been forced to advertise for customers. Often, the only ones attracted are existing homeowners seeking better terms.
In effect, the federation suggests the economy has been put on hold, with major financial and business commitments avoided. "Uncertainty and pessimism pervade the investment and spending climate," said Dunkelberg.
While the federation's survey has won a following mainly for its ability to foretell economic conditions six months ahead, it also measures confidence in leadership.