The chart of the main NFIB survey is a telling graphic on the state of the economy. While the index reached its local low in August of 2006 and there is a sort of bounce in train since then (dead-cat bounce?), the index remains ‘locked’ in the throes of a broad downtrend. This month’s slippage brings the index that much closer to breaking down the fragile up trend that is an artifact of the broader, more powerful, downtrend range and it asks legitimate questions about growth and the contribution of small business - the key driver of job growth.

We can peruse the details of the report for more clues as to what is weak and why. We present in the table below the net balance measures from the various questions in the NFIB surveys. The final column expresses each of these as a point in the range of values the measure had taken on since 1990. A high reading (say 100%) means the measure is at the top of its range of values for the period the lowest read is 0% and it would signify the weakest reading of the period.

A quick look at column five shows that most values are below 50%, implying that they are below the midpoint of their respective range of values since 1990.

As for recessions, the NFIB does not seem to be a good gauge of those since it did not trough in the last recession but rather in April of 2003 well into recovery.

The report has some interesting features about the economy apart from bearing witness on recession. It tells us that firms are raising prices to a greater than normal degree, net positive responses to the question are in the nearly the 70^th percentile; this also seems to be reflected in wages in their 63^rd percentile - also above average. Still, firms are increasing employment at an above average pace (57^Th percentile) and reporting higher sales Q/Q, 57^th percentile.

Firms are downbeat, however, on some key forward-looking aspects: they do not see easing credit conditions. They do not see the economy improving (21 percentile of that range!) and they are below average in seeing real sales rise 6-months out. Consequently firms are not planning capital improvements; those plans are in the bottom 25 percentile of their range.

By the way, I prefer this percent of range approach to the raw net balance figures because the net balance figures across responses have all different characteristics. The percentile measures let us see the position of response relative to past responses instead of Vs the zero or neutral reading. I find this more useful

Around the 50^th percentile business conditions are not bad. And most NFIB responses are in the 40% to 60% range. But some are not, and those that are not, are weaker. Seeing bottom 25 percentile responses to the question ‘good time to expand?’ and “planning in capital spending over the next 3 to 6 months?” is not a sign of confidence. For now what we have is a still strong labor reading. And NFIB expectations could be wrong. Who is clairvoyant after all? But now these concerns will hold back expansions and only feed the hand to mouth demands. We have seen some improvement in capital spending plans by the firms that report to the durable goods report and maybe this trend will have some positive impact on independent businesses down the road.

For now this is a decidedly downbeat report on the economy.