According to the NFIB, the current recession has been harder on small business profits than any time over the past 35 years. And profits slipped again this past month.

"When profits are bad, like now, small business owners cannot reinvest, except to replace things," said Bill Dunkelberg, NFIB chief economist.

Plans to make capital expenditures fell again to 17 percent, continuing a run of historically low readings. One consequence of this has been a huge reduction in inventories, with record numbers of firms reducing their inventories to line up stock with lower customer spending. In June, the net percent planning to add to inventories over the next three months was negative 6 percent, indicating further planned reductions.

A major cost-cutting activity has been focused on one of the largest costs - labor. Over the past six months, owners have reduced employment at a record pace. Plans to expand employment got a boost in June (up four points to a net negative 1 percent of firms planning to hire in the next three months). The number of firms with job openings to fill increased two points to 11 percent in June. However, small employers continue to hold wages and other employee compensation in check, with 11 percent of owners raising compensation while 12 percent reduced it, the worst showing for a "raise" in survey history.

Expanding small business loan programs is not the answer to this problem. It is time for policy makers who support free markets to step forward and push for income tax cuts.

Since most of these small businesses are pass through entities for income taxes, cutting taxes will have an immediate impact of profits, which will allow them to reinvest, build inventories, and begin to hire again.
 

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