Small Business Economic Trends - May 2013
SUMMARY
OPTIMISM INDEX
The Index gained 2.6 points, rising to 92.1. That beats falling, but it is barely above the recovery average of 90.7, making it another very poor reading. Four Index components rose, 2 fell, 6 were unchanged, a lot of “noise”, no clear direction. Owners are very pessimistic about the economy, with a net negative 15 percent expecting business conditions to be better in 6 months. As bad as that sounds, it was a 13 percentage point improvement over March.
LABOR MARKETS
Forty-nine (49) percent of the owners hired or tried to hire in the last three months and 38 percent (78 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Compensation has been improving but only gradually and grudgingly. Eighteen percent of all owners reported job openings they could not fill in the current period (unchanged). This measure is highly correlated (inversely) with the unemployment rate, and its failure to improve suggests that the unemployment rate will not improve unless, of course, more unemployed leave the labor force. Thirteen percent reported using temporary workers, little changed over the past 10 years. Job creation plans rose 6 points to a net 6 percent planning to increase total employment, outcome nice improvement after the 4 point decline in March. Perhaps the “frost” in March didn’t do as much damage to the “green shoots” as some feared. However, owners are still pessimistic and see little reason to hire relative to what would be expected late in the fourth year of an expansion.
CAPITAL SPENDING
The frequency of reported capital outlays over the past 6 months fell 1 point to 56 percent, after rising steadily since January, though by very small amounts. The frequency of expenditures remain at the high end of recession-type readings, consistent with the lack of interest in expansion and the grim (but improving) outlook for business conditions. Overall, the frequency of expenditures improved, but not to levels typical of a normal expansion. The percent of owners planning capital outlays in the next 3 to 6 fell 2 points to 23 percent. Four percent characterized the current period as a good time to expand facilities and the net percent of owners expecting better business conditions in 6 months was a net negative 15 percent, 13 points better but still quite negative. With such a dim view of the future, owners are not likely to do a lot of spending on expansion and new equipment. Overall, spending showed some improvement and plans to spend did not fall, but all remained at low levels, not typical of a period of solid economic growth.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the first quarter compared to the fourth quarter of 2012 rose 3 points to a negative 4 percent. The low for this cycle was a net negative 34 percent (July 2009) reporting quarter over quarter gains. Sixteen (16) 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 8 points to 4 percent of all owners (seasonally adjusted). The pace of inventory reduction continued, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted). For all firms, a net negative 1 percent (unchanged) reported stocks too low, historically a good level of satisfaction with inventory stocks. Plans to add to inventories gained 5 points but rose only to a net 0 percent of all firms (seasonally adjusted).
INFLATION
Fifteen (15) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 2 points), and 20 percent reported price increases (up 2 points). Seasonally adjusted, the net percent of owners raising selling prices was 3 percent, up 4 points. Twenty-one (21) percent plan on raising average prices in the next few months (unchanged), and 3 percent plan reductions (unchanged). Seasonally adjusted, a net 18 percent plan price hikes, up 1 point. Overall, there is little evidence of inflationary pressures on Main Street.
PROFITS AND WAGES
Reports of positive earnings trends were unchanged after a 3 point improvement in March, holding at a negative 23 percent, a poor reading. Three percent reported reduced worker compensation and 19 percent reported raising compensation, yielding a seasonally adjusted net 15 percent reporting higher worker compensation (down 1 point). Overall, this is good news for employees, as compensation gains have been trending up, holding at double digit levels since 2011. A net seasonally adjusted 9 percent plan to raise compensation in the coming months, unchanged.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, down 1 point and only 2 points above the record low. Thirty-one (31) percent reported all credit needs met, and 50 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 23 percent citing taxes. Thirty-one (31) percent of all owners reported borrowing on a regular basis. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 3 points. The average rate paid on short maturity loans was 5.6 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8 percent (more owners expect that it will be “harder” to arrange financing than easier), 2 points worse than in March.
COMMENTARY
The world is starting to look a bit strange in many respects. Stock markets are at record high levels and corporate profits a record share of GDP (nominal). Yet real GDP barely grew in 2012 Q4 and a sub-par 2.5 percent in 2013 Q1. Just how we get record profits but hardly produce more output and have prices hardly growing is a bit of a contradiction. The NFIB survey suggests that the small-business sector is not growing. New business starts appear to be slightly ahead of terminations, but both levels are historically low. The Federal Reserve has stopped worrying about inflation. (Historically, inflation was considered the #1 concern of the Fed.) The Vice- chair of the Fed has suggested that inflation will now be a tool used to impact employment rather than a target of policy. Although one can argue that without Quantitative Easing there would have been even less job growth, it does not appear that the massive QEs have had much of an impact on employment growth. The Fed is providing a trillion dollars’ worth of finance to the government, money that it does not have to tax from us or borrow from the private sector or the rest of the world. Debt is piling up and future servicing costs will be formidable. Meantime, interest income to consumers has declined half a trillion dollars over the past few years, that’s a huge loss of income and certainly impairs spending. Washington is always ready to help debtors but not savers.
Small-business owners remain quite pessimistic about the future and this has depressed spending and hiring. Capital spending is low which will eventually impact worker productivity as will the conversion of full-time workers to part-time workers induced by the health care law. Managing two part-time workers to do the work of one full-time worker too expensive to hire will add to inefficiency. Although better than the past few months, the percent expecting business conditions to be worse in 6 months exceed the percent expecting improvement by 15 percentage points. More now expect real sales to be higher than lower by 4 percentage points, better than the past 6 months in which the margin was negative, but very thin. Only 4 percent think it’s a good time to expand. In “normal” times, that would be a double digit figure. Owners are preparing for higher taxes and the full implementation of the health care law, both large negatives. Consumers agree, less than 10 percent think government is doing a “good” job, 47 percent firmly believe it is “bad”. More customers would trigger more hiring and inventory investment and capital spending, but consumers seem to be unwilling to cooperate. But, only 23 percent plan to make capital expenditures and as many firms plan to cut inventories as plan to add to them. This does not stimulate much growth.
This survey was conducted in April 2013. A sample of 10,799 small-business owners/members was drawn. One thousand eight hundred and seventy-three (1,873) usable responses were received – a response rate of 18 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2013, the NFIB retains ownership. All Rights Reserved.
