Small Business Economic Trends - July 2013
SUMMARY
OPTIMISM INDEX
The Index dropped 0.9 points in June, ending the hope that a revival in sentiment have started. Six of the ten Index components fell, two rose and two were unchanged. The inventory picture deteriorated and was the main contributor to the decline in the Index. More owners were less satisfied with current inventory holdings and plans to increase in the future also deteriorated. So, after two months of solid gains, the Index gave up. No surprise, there was no reason to be more optimistic and lots to worry about.
LABOR MARKETS
Eleven (11) percent of the owners (up 2 points) reported adding an average of 3.6 workers per firm over the past few months. Offsetting that, 12 percent reduced employment (unchanged) an average of 4.3 workers (seasonally adjusted), producing a seasonally adjusted gain of negative 0.09 workers per firm overall. Fifty-three (53) percent of the owners hired or tried to hire in the last three months and 41 percent reported few or no qualified applicants for open positions. A net 14 percent reported raising compensation, 2 points below May, which was the highest reading since September 2008. Nineteen (19) percent of all owners reported job openings they could not fill in the current period (unchanged). Twelve (12) percent reported using temporary workers, little changed over the past 10 years. Job creation plans rose 2 points to a net 7 percent planning to increase total employment, better, but still a weak reading. Overall, the labor indicators held up pretty well, suggesting no improvement of any consequence, just more of the same.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months gave up 4 points, falling to a negative 8 percent. Eighteen (18) 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 lost 3 points, falling to 5 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), unchanged from May.
For all firms, a net negative 2 percent (down 3 points) reported stocks too low, a sharp deterioration from May and consistent with weak spending which produces a buildup in stocks. This produced a sharp decline in the net percent of owners planning to add to inventories, falling 4 points to a negative 1 percent of all firms (seasonally adjusted). Apparently the optimism of the past few months did not come to fruition, producing a sharp reversal in the outlook for inventory spending.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months fell 1 point to 56 percent, 9 points below the average spending rate through 2007. Spending overall remains in “replacement mode”, no exuberance in spending, consistent with a dim view of the future for the economy. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 23 percent. Seven percent characterized the current period as a good time to expand facilities (down 1 point), a very weak number compared to an average value of 16 percent pre-recession. The net percent of owners expecting better business conditions in 6 months was a net negative 4 percent, a 1 point improvement. A net 5 percent of all owners expect improved real sales volumes, down 3 points. Eighteen (18) percent reported “poor sales” as their top business problem, up 2 points, Reported sales trends deteriorated 4 points to a negative 8 percent. These are not solid numbers and certainly not supportive of a surge in capital spending this year.
INFLATION
Twelve (12) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 4 points), and 19 percent reported price increases (unchanged). Seasonally adjusted, a net 18 percent plan price hikes, up 3 points. Overall, the net percent of owners raising prices moved back into the post-1983 range, with modest pressure on prices. There’s no “deflation” on Main Street however and, of course, not much inflationary pressure either.
EARNINGS AND WAGES
Reports of positive earnings trends deteriorated 1 point in June to a negative 23 percent, a poor reading. Four percent reported reduced worker compensation and 19 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation (down 2 points). A net seasonally adjusted 6 percent plan to raise compensation in the coming months, down 3 points. Overall, the compensation picture weakened some, but remained at the higher end of experience in this recovery even if historically weak.
CREDIT MARKETS
Five percent of the owners reported that all their credit needs were not met, unchanged and the lowest reading since February 2008. Twenty-nine (29) percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 20 percent citing taxes, 18 percent citing weak sales and 20 percent citing regulations and red tape. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, unchanged. A net 6 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), 1 point worse than last month. The average rate paid on short maturity loans was 5.2 percent, a substantial drop from the average for the past year. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 7 percent.
COMMENTARY
The revision of first quarter GDP growth to an anemic 1.8 percent at an annual rate confirms that the economy is growing at a very slow pace, not enough to produce many new jobs. The largest contributor to the negative revision was consumer spending, in particular to spending on services, which account for about 70 percent of consumer spending. This sector is very labor intensive and a revival of spending there would certainly improve job creation. Housing is getting better but running into some supply side constraints. Nearly half the builders complain that they are having trouble assembling work crews to build new houses while new home sales are pressing against supply. House prices are rising at double digit rates.
In the meantime, uncertainty reigns supreme, who knows what labor will cost or when or what firm size will have to comply with which rules – Health and Human Services is still writing them. The President’s delay for compliance among those with 50 employees or more is a political move, fearing the bad press that might occur prior to elections from the chaos produced by mandatory compliance. It is clear that the government is not prepared to implement this. Really, a group of people, most with little or no private sector experience, decided to restructure 15 percent of the Gross Domestic Product (GDP). This is what we expected, a rolling disaster – exemptions, special deals, delays, confusion, contradictory regulations. It’s a bad situation in Washington, scandals, no budget deals, no dealing with the big problems, our own government agencies taking advantage of us, Congressional law being suspended by the President, a flood of executive orders, the threat of higher energy costs (the attack on coal). Not a good time to bet on the future by hiring lots of workers with uncertain cost. The NFIB June survey confirms that.
The economy remains “bifurcated”, with the big firms producing most of the GDP growth with little help from small business. That balance is shifting, but unfortunately because larger firms are losing ground, not because small business is growing faster. Housing and energy are helping, and that does involve a lot of small businesses but the rout in housing was so severe that there are now supply constraints developing in new home construction due to lost capacity that cannot be easily reconstituted. Home prices are now increasing at double digit rates. Consumer net worth is allegedly doing well due to stock prices and house prices rising. But the quantity of items held, real wealth (houses, cars, fractions of a company owned), is not increasing that fast, just the prices. Been there, done that.
This survey was conducted in June 2013. A sample of 3,938 small-business owners/members was drawn. Six hundred sixty-two (662) usable responses were received – a response rate of 17 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2013, the NFIB retains ownership. All Rights Reserved.
