Small Business Economic Trends - February 2013
SUMMARY
OPTIMISM INDEX
The NFIB Index of Small Business Optimism increased 0.9 points to 88.9, still one of the lowest readings in the survey’s 40 year history. Economic growth in the fourth quarter turned negative. Yes, 2 million jobs were added last year, but the population grew by 3 million so, mathematically, far fewer of those who were dislocated by the recession have found a job. It is no surprise that consumer sentiment remains depressed as well. Expectations for business conditions in six months improved 5 points to negative 30 percent, the fourth lowest reading in survey history. Owner pessimism is certainly not surprising in light of higher taxes, rising health insurance costs and increasing regulations. There was very little to be positive about. Only 11 percent of consumers thought government was doing a good job in the Reuters/University of Michigan survey, a very poor showing.
LABOR MARKETS
Forty-three (43) percent of the owners hired or tried to hire in the last three months and 34 percent (79 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. More owners are now reporting net hiring than are reporting reductions, a positive development if it holds up. Eighteen (18) percent of all owners reported job openings they could not fill in the current period, up 2 points from December but still historically low for an expansion. This measure is highly correlated with the unemployment rate, so the NFIB survey anticipated little change in the rate. Job creation plans regained some of the December loss, rising 2 points to a net 3 percent planning to increase total employment. It is clear that the fourth quarter in 2012 was weaker, and plans have not regained the levels reached in early 2012.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose 3 point to 55 percent, still in “maintenance mode” but at least an increase. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 21 percent. Six percent characterized the current period as a good time to expand facilities (down 2 points), historically a very weak number. The net percent of owners expecting better business conditions in 6 months was a net negative 30 percent, 5 points better than December but still disastrous, the fourth lowest reading in nearly 40 years. Overall, spending remained in “maintenance” mode, at levels only slightly better than during the Great Recession. And, with a very bearish outlook on the economy, plans to spend remained depressed.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months improved 1 point to a negative 9 percent. The five year high of a net 4 percent was reached in April last year. Nineteen (19) percent still cite weak sales as their top business problem, historically high, but far better than the record 34 percent reading last reached in March 2010. The net percent of owners expecting higher real sales volumes rose 1 point to a negative 1 percent of all owners (seasonally adjusted). The pace of inventory reduction continued with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), 3 points better than December, but still more owners reducing stocks than adding to them. But, with rather dismal sales expectations, plans to add to inventories remained weak at a net negative 7 percent of all firms (seasonally adjusted), 3 points worse than December.
INFLATION
Nineteen percent of the NFIB owners reported raising their average selling prices in the past three months (up 3 points), and 15 percent reported price reductions (down 2 points). Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, up 2 points. Seasonally adjusted, a net 21 percent plan price hikes, up 5 points. The recession and the weak recovery have made sure that the lid stays on inflation. There is still far too much capacity and far too few customers to produce a rising price level.
PROFITS AND WAGES
Reports of positive earnings trends improved 3 points in January after a 3 point improvement in December, rising to a net negative 26 percent, still a dismal reading. Three percent reported reduced worker compensation and 14 percent reported raising compensation, yielding a seasonally adjusted net 13 percent reporting higher worker compensation (unchanged). A net seasonally adjusted 7 percent plan to raise compensation in the coming months, up 2 points from December. Earnings are the major source of capital for small firms to finance growth and expansion (and repay debts incurred to invest in their firms). With rising tax rates for many owners, rising health care costs, and a flood of new regulations to comply with, generating the profits needed to grow businesses will be more challenging in 2013.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, unchanged from December. Thirty-one (31) percent reported all credit needs met and 3 percent reported that financing was their top business problem. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 2 points from December and historically low. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), 2 points lower than December. The average rate paid on short maturity loans was 5.5 percent, stuck at much the same level for years.
COMMENTARY
Bad news continued to dominate the information flow to business owners. GDP actually fell in the fourth quarter, and grew less than 2 percent for all of 2012. A sharp decline in defense spending subtracted about 1.3 percentage points from the growth rate, a warning as to what might happen if sequestration actually occurs with no deal to change its magnitude and timing. A sharp decline in inventory building also knocked a point or more off the GDP growth rate. But even if those events had not occurred, overall growth would have still been around 2 percent, not enough to produce the jobs needed to reduce unemployment meaningfully. Indeed, the unemployment rate went up. Now the focus is on what Congress will do to avoid the sequestration and deal with the debt limit. Odds are a deal will be reached, but uncertainty reigns, just what it will look like, how much more in tax revenue and how meaningful spending reductions will be is very unclear. As a consequence, uncertainty about the growth in the economy and economic policy continues to depress investment spending and hiring and keeps consumers depressed and spending less as well.
So, no surprise, the Optimism Index barely budged. The only good news is that it “budged “up, not down. Still, the outlook for business condition mid- year is grim, Thirty-five percent expect conditions to be worse, 10 points better than December, but historically one of the worst readings in 40 years of survey history, rivaling the 1980 figures. Many economists argue that what is needed is new firms to start and create new jobs. Nice idea, but it would take a net 1.6 million new starts (with an average of 5 employees) to employ the 8 million who lost their jobs in the Great Recession. “New” firms didn’t lay off those workers, “existing” firms did, and they must re- hire workers if the unemployment rate is to be significantly reduced. And, not many new firms will start in this environment. Until recently, far more firms were being eliminated than started because we not only built too many houses in the boom, we also started too many new firms to serve consumers that were spending 99 percent of every after-tax income dollar in late 2008. Population growth generates the need for more firms and job growth in the long haul, but our current problem is that existing firms still haven’t re-hired to their 2007 levels. A huge chunk of this is in construction.
Whatever Congress does, the private sector will continue to push the economy forward. As Thoreau once observed, the only way government can help business is to get out of the way. Congress can certainly slow the economy down, even help create crises, but in the longer run, the economy will grow, especially with population growth of 3 million annually (thus housing must recover). We just have to wait and see what the “management team” decides to do for USA, Inc. Hopefully, their decisions will improve our “bottom line”.
This survey was conducted in January 2013. A sample of 10,799 small-business owners/members was drawn. Two thousand and thirty-three (2,033) usable responses were received – a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.
