Small Business Economic Trends - April 2013
SUMMARY
OPTIMISM INDEX
After three months of sustained growth, the March NFIB Index of Small Business Optimism ended its slow climb, declining 1.3 points and landing at 89.5. In the 44 months of economic expansion since the beginning of the recovery in July 2009, the Index has averaged 90.7, putting the March reading below the mean for this period. Of the ten Index components, two increased, two were unchanged and six declined. Among the greatest declines were labor market indicators, inventory investment plans and sales expectations.
LABOR MARKETS
Job creation in the small-business sector was perhaps the only bright spot in the March report. The fourth consecutive month of positive job growth, owners reported increasing employment an average of 0.19 workers per firm in the month of March. This is the best reading NFIB has recorded in a year. For the 47 percent of owners who hired or tried to hire in the last three months, 36 percent (77 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Owners are still pessimistic and see little reason to hire. Eighteen (18) percent of all owners reported job openings they could not fill in the current period, down 3 points from February. This measure is highly correlated (inversely) with the unemployment rate, so it is suggestive of a minor increase in the percent of our labor force that is unemployed. Much will depend on labor force participation changes of course. Job creation plans fell 4 points to a net 0 percent planning to increase total employment, a disappointing outcome.
CAPITAL SPENDING
When it comes to business investment, owners are still in “maintenance mode.” The frequency of reported capital outlays over the past six months rose 1 point to 57 percent, rising steadily since January, though by very small amounts. The percent of owners planning capital outlays in the next three to six months was unchanged at 25 percent. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 25 percent. Four percent characterized the current period as a good time to expand facilities (down 1 point), historically a very weak number. The net percent of owners expecting better business conditions in 6 months was a net negative 28 percent, unchanged from February but 7 points better than December. These readings are among the lowest in the 40 year history of the NFIB survey.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was negative 7 percent, an improvement of 2 points and the best reading in eight months. However, firms are still reporting more declines than gains. Such a negative outlook will not stimulate a lot of hiring or spending or inventory investment. The net percent of owners expecting higher real sales volumes fell 5 points to a negative 4 percent of all owners (seasonally adjusted), 16 points below the 2012 cycle high of a net 12 percent reached in February 2012. Seventeen (17) percent of small employers cite weak sales as their top business problem, a one point improvement over February.
For all firms, a net negative one percent (down 2 points) reported stocks too low, historically a good level of satisfaction with inventory stocks. The pace of inventory reduction continued, with a net negative six percent of all owners reporting growth in inventories (seasonally adjusted), 3 points better than February, but still more owners reducing stocks than adding to them.
INFLATION
Seventeen (17) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 1 point), and 18 percent reported price increases (down 3 points). Seasonally adjusted, the net percent of owners raising selling prices was a negative 1 percent, down 3 points. There isn’t much Main Street inflation when more firms are cutting average selling prices than raising them. Twenty-one (21) percent plan on raising average prices in the next few months (down 5 points), and 3 percent plan reductions (up 1 point). Seasonally adjusted, a net 17 percent plan price hikes, down 6 points. Main Street is certainly behaving the way the Fed likes, no price pressures to be seen.
EARNINGS AND WAGES
Reports of positive earnings trends improved 3 points, but landed at a negative 23 percent, a very poor reading. Progress, but not much. At the same time, the Fortune 500 is posting record high profits. Clearly we have a bifurcated economy, with large firms making hay but GDP growing little. If all firms were publically traded, the stock market wouldn’t look so good. Five percent reported reduced worker compensation and 21 percent reported raising compensation, yielding a seasonally adjusted net 16 percent reporting higher worker compensation (up 2 points). This is good news for employees. So, compensation has not yet produced a lot of pressure on prices. Instead, profit performance has been depressed. Looking forward, owners face rising costs from energy, health care and regulatory compliance, adding a lot of cost without contributing much if anything to productivity improvements or cost reductions.
CREDIT MARKETS
Credit demands remained weak in March. Twenty-nine (29) percent reported all credit needs met, and 49 percent explicitly said they did not want a loan (64 percent including those who did not answer the question, presumably uninterested in borrowing as well). Seven percent of owners surveyed reported that all their credit needs were not met, unchanged from February and 3 points above the record low.
COMMENTARY
Small business produces half the private GDP and employs half the private sector workforce. But it is not growing, not hiring, not borrowing and not expanding enough. Small business owners have been depressed since 2007 and that has not changed. In the March survey of NFIB’s 350,000 member firms, 77 percent expect the economy to be no better or even worse 6 months from now that it is currently. Only 4 percent think the current period is a good time to expand substantially, compared to an average of 17 percent for the period 1973 to 2007. More owners plan to reduce employment in the coming months than plan to create new jobs. More owners plan to reduce their inventories than plan to order new stocks. The bulk of growth comes from the increase in our population of about 3 million people and the growing need to simply replace stuff that is wearing out, not enough to get the economy back to trend growth much less the strong growth needed to restore employment to 2007 levels.
The Federal Reserve continues to assert its intention to purchase a trillion dollars of Treasury securities and mortgages, adding a trillion dollars to its portfolio and stuffing a trillion dollars of new liquidity into the banking system, until the unemployment rate falls below 6.5% or inflation breaks out. Then it will “consider” changing policy. Unless something really bad happens, this is a winning strategy for the Fed because eventually the private sector will improve, the labor force will shrink (as boomers leave), the unemployment rate will fall and the Fed can claim its policies “worked”, even if their policies made no contribution to the improvement or even slowed it down by creating uncertainty and fear among investors and business owners.
This is a risky strategy. The evidence that “uncertainty” is slowing the economy is pretty clear now (research at the San Francisco Federal Reserve for example) and uncertainty probably increases with the size of the Fed’s portfolio (as has the price of gold). The real economy is hardly growing yet the stock market and corporate profits are at record high levels. How do we make a record amount of money without producing more output and employing more workers? Such contradictions breed uncertainty.
In the meantime, a record low percentage of small business owners claim that credit is their top business problem (3%) while taxes get the most votes (23%). Record numbers of owners have no interest in a loan (over 60%), because they have no use for the funds that have a high probability of successfully generating a return so the loan can be repaid. The Fed has made sure that there is plenty of money to lend, but in the process may have reduced the confidence that borrows need to take risks, borrow, spend and expand. And then there’s the impact of fiscal policy (or the lack of a policy). The President is flying around the country doing fund-raisers and stumping for gun control, but he still has presented no budget proposal. Enough said.
This survey was conducted in March 2013. A sample of 3,938 small-business owners/members was drawn. Seven hundred fifty-nine (759) usable responses were received – a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2013, the NFIB retains ownership. All Rights Reserved.
