No Recession Yet According to
Small Business Survey

Less gloomy news is apparent in a recent survey of 500,000 small business members of the National Federation of Independent Business. The Index of Small Business Optimism fell slightly to 97.8 (1986 = 100) due mostly to declines in capital spending and job openings. However, the Index does not signal a recession ahead, instead predicting GDP growth of 1.5% in both the first and second quarters.

The most significant new information in this latest survey was the decline in "hard-to-fill" job openings. The percent of firms reporting hard to fill openings fell 6 points to 26%, the lowest reading since January 1998. According to NFIB chief economist William Dunkelberg, this reading foreshadows a solid increase in unemployment over the next few months. He notes that labor markets have been exceptionally tight for several years. Reports of unfilled openings peaked in November 2000 at 35 percent. As the economy slows, unfilled job openings would be the first thing firms would cut, cushioning current employees against job loss. In his survey report Dunkelberg wrote "It is clear that there is not an "upturn" in our near future. The economy has slowed; job creation was negative for the first quarter overall and spending plans have been scaled back as sales and profits decline. These "declines" are from record, arguably unsustainable, levels. If you can't sell 17 million cars every year, employment must be scaled back. But, 15 million units a year is not a "recession."

The proportion of optimistic small business owners has actually increased since December 2000. The net percent of owners expecting the economy to be "better" in six months increased from -16% in December to +4% in March. This suggests that small business owners do not see a recession in the near term, or at least not a significant downturn. Dunkelberg noted that three months prior to the onset of the 1980 recession, this Index component fell to -37, and dropped to -23 just prior to the 1990 recession.

The big question is whether the reductions in hiring plans will fuel more consumer pessimism and snowball into a deeper downturn. But, Dunkelberg sees no signs of accelerating downward trends in the small business responses. Consequently, he still sees the "soft-landing" scenario as the most likely path for the economy this year as activity is gradually scaled down to more sustainable levels.

Researchers at the National Bureau of Economic Research (NBER) agree. The NBER is a non-profit research organization of academics, which has become the accepted arbiter of the business cycle. Most economists refer to the NBER for dating peaks and troughs in the business cycle, and determining when recessions officially begin and end. Keep in mind that their official pronouncements are often many months after the actual event, and are forthcoming only when the data clearly signal that a turn in economic activity took place. Nevertheless, in mid-April Robert Hall, chairman of the NBER's business cycle dating committee issued the opinion that "Nothing in the data is yet anywhere close to the point that the NBER would investigate whether a peak occurred in late 2000."