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

4. Small Business Economic Trends

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.