Small Business Economic Trends - August 2011
Summary
OPTIMISM INDEX
The Index of Small Business Optimism fell 0.9 points in July to 89.9. This was the 5th monthly decline in a row. None of the declines were large but the trend is still going in the wrong direction. At the two year anniversary of the expansion, the Index is only 3.5 points higher than in July 2009 - still firmly rooted in recession territory. Expectations for real sales growth and business conditions were the major contributors to the decline.
LABOR MARKETS
Last month, 12 percent (seasonally adjusted) of the owners added jobs, but 14 percent reduced employment, leaving us with a net negative 2 percent of firms adding jobs in July. The remaining 74 percent of owners made no net change in employment, suggesting that firms are holding steady but not planning to grow any time soon. While an improvement from June, job creation still remains solidly negative. Twelve percent (seasonally adjusted) reported unfilled job openings, a disappointing 3 point decline from June. Over the next three months, 10 percent plan to increase employment (down 1 point), and 11 percent plan to reduce their workforce (up 4 points), yielding a seasonally adjusted net 2 percent of owners planning to create new jobs, down 1 point from June. The poor recovery in the jobs numbers is a result of very low housing starts activity and lagging expenditures on ‘services’, both labor intensive industries dominated by small firms. Housing starts show little hope for much job creation in construction in the near future and the most recent reports on consumer spending show continued weakness, with retail sales falling. Without sales, there is little reason to expand. And with Washington politics being as they are, there is plenty of reason to remain uncertain.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six point months was unchanged at 50 percent of all firms, an historically weak reading that has persisted for most of the recovery. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 20 percent, a recession level reading that has typified the recovery to date. Six percent characterized the current period as a good time to expand facilities (seasonally adjusted), up 2 points but 2 points lower than January. The net percent of owners expecting better business conditions in six months was a negative 15 percent, down 4 points, and 25 percentage points lower than January. Twenty-three (23) percent report “poor sales” as their top business problem. Uncertainty is the enemy, and there is plenty of it to convince owners (and consumers) to be cautious (consumer confidence measures weakened in July).
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher
nominal sales over the past three months lost 1 percentage point, falling to a net negative 8 percent, more firms with sales trending down than up, but still the 3rd best reading in 42 months - a sign of how difficult the recovery has been. The net percent of owners expecting higher real sales fell 2 points to a net negative 2 percent of all owners (seasonally adjusted), 15 points below January’s reading. This is bad news for hiring and inventory investment. A net negative 13 percent of all owners reported growth in inventories (seasonally adjusted), a 1 point improvement from June but double the March reading. Although overall firms are reasonably satisfied with stocks, there are still a large number of firms in “liquidation” mode. For all firms, a net 0 percent (up 1 point) reported stocks too low, a “satisfied” reading based on survey history. Stocks are not excessive, but with rather pessimistic sales expectations, no need to order more. Plans to add to inventories remained unchanged at a net negative 3 percent of all firms (seasonally adjusted), consistent with weak sales expectations and a poor economic outlook.
INFLATION
Eighteen (18) percent of the NFIB owners reported raising their average selling prices in the past three months (up 2 points), compared to 24 percent who reported price reductions (down 1 points). Seasonally adjusted, the net percent raising selling prices was 7 percent, down 3 points and half the rate observed in May. The push on prices from Main Street is apparently easing but is still positive. Seasonally adjusted, a net 19 percent plan price hikes, up 4 points. If accomplished, the inflation measures will rise.
PROFITS AND WAGES
Reports of positive earnings trends were unchanged at a net negative 24 percent of all owners, not a pretty picture, but the best reading in 43 months. Profits are getting some support from rising prices and some improvement in sales trends, but it isn’t much. Six percent reported reduced worker compensation and 16 percent reported gains yielding a seasonally adjusted net 10 percent reporting higher worker compensation, a 2 point gain. A seasonally adjusted 6 percent plan to raise compensation in the coming months, down 1 point from June.
COMMENTARY
It is hard to think of anything that happened in July that would make owners more optimistic. The second quarter Gross Domestic Product (GDP) growth report was abysmal (1.3%) and Q1 was revised from 1.9% to 0.4%. Indeed, the government reported that the entire recession period was even worse that we thought. The decline in GDP was revised to -5.1%, one full point worse than previously estimated.
Congress did not come up with a budget plan by the time the month ended, and the likes of Paul Krugman (NYT July 30) continued highly partisan assaults on the Republicans. His claim that high tax rates were responsible for the surpluses in the late 1990s is pure political bunk (many Democrats claim this). I thought it was the outrageous levels of capital gains tax revenues from the DotCom bubble and the record employment levels that resulted from the Y2K/Telecom investment boom, along with a Republican controlled Congress that yielded the surpluses. Maybe the Administration can magically concoct another Y2K event in the calendar. Even small business capital spending hit record levels in that investment boom.
Mr. Krugman also blames people who want government spending curtailed for holding us hostage in raising the debt ceiling. More likely the reverse is true, it is those who will not consider curtailing the reach of government that will not agree to a deal. They are holding sensible people hostage to their view of a larger government at the expense of small business owners. There is no limit to the amount of private income Congress will spend on its pet project - mostly designed to keep them in elected office.
The July survey anticipates slow growth for the remainder of the year, high unemployment rates, inflation rates that are too high and little progress on job creation. It seems for all the activity in Washington, D.C…they have done nothing but create a sizeable helping of anxiety, exactly what we don’t need.
This survey was conducted in July 2011. A sample of 10,799 small-business owners/members was drawn. One thousand nine hundred ten (1,910) usable responses were received - a response rate of 17 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2011, the NFIB retains ownership. All Rights Reserved.
