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) Seasonally Adjusted Source: NFIB Research Foundation

Small Business Economic Trends

Outlook for Business Expansion (Pct. “Now Is a Good Time”) “ NO” for 20 Quarters

“Not a Good” Time to Expand DUE TO ________ As Pct. Saying “Not a Good Time” Source: NFIB Research Foundation

Reported Change in Past Sales (Last Three Months vs. Prior Three) Recession Ends Source: NFIB Research Foundation

Earnings Trends - Pct. “Higher” – Pct. “Lower”

Planned Capital Outlays ( Next Three to Six Months) Source: NFIB Research Foundation

INVENTORY INVESTMENT PLANS [% PLAN INCREASE – % PLAN DECREASE] Source: NFIB Research Foundation

Job Openings - (Pct. with at Least One Unfilled Opening)

Net Percent Raising Prices 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 Source: NFIB Research Foundation

Single Most Important Small Business Problem: 2000 – 2013 (monthly) Source: NFIB Research Foundation

Most Important Problems Prob. RankProblem – Aug 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 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: (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 VariablesBS.E.WalddfSig.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 Applicant = 0, Non = 1; n = 2107; -2 Log likelihood = ; Cox &Snell R 2 =.084; Nagelkerke R 2 =.115

Logistic Regression Results Contrasting Accepted and Rejected Borrowers; 2009 – 2011 VariablesBS.E.WalddfSig.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 Accept = 1, Reject = 0; n = 1231; - 2 Log likelihood = ; Cox &Snell R 2 =.144; Nagelkerke R 2 =.193

Credit Approval and Discouraged Borrowers in States Grouped by Residential Mortgages with Negative Equity Credit ApprovalHigh Negative Eq.Med. Negative Eq. Low Negative Eq.All States Accepted Rejected 43% 57 59% 41 63% 37 56% 44 N Not BorrowingHigh Negative Eq.Med. Negative Eq. Low Negative Eq.All States Non-Borrower Discouraged Borrower 84% 16 84% 16 89% 11 85% 15 N Source: NFIB Research Foundation

Small-Employer-Owned Real Estate by Selected Real Estate Finance Characteristics – 2010 ResidentialBusiness 1 InvestmentAll Real Estate CharacteristicTotal 2 Own 3 Mort. 4 Own 1 st Mortgage 2 nd Mortgage Upside-Down Mort. For Bus. Purposes Used as Collateral 94% 61 65% % % 19 63% % % 18 49% 2 5 9% % 68 71% % N Source : “Small Business and Credit Access,” NFIB Research Foundation, January 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.