Small Business Economic Trends - September 2013
SUMMARY
OPTIMISM INDEX
Owner optimism went nowhere in August as the Index fell 0.1 points, statistically no change. As “calm” as the Index appears, there was turmoil in the details. Job creation plans jumped 7 points to levels not seen since 2007. Yet, last month firms shed the largest number of employees in months. Capital spending and inventory investment plans increased as well, all activities that would put some energy into GDP growth. But, reports of quarter to quarter net gains in sales deteriorated 17 points and profit trends followed, giving up 13 points. Expectations for business conditions in six months also became more negative. Yet, sales expectations improved 8 points. All of this is a rather perplexing set of statistics; internally consistent on some dimensions as lower sales bring lower profits, but contradictory in other ways with lower job openings but huge gains in hiring plans. The September survey will hopefully straighten this out.
LABOR MARKETS
Forty-seven (47) percent of the owners hired or tried to hire in the last three months and 36 percent reported few or no qualified applicants for open positions. Reports of workforce reductions have reached normal or sub-normal levels, explaining the favorable levels of initial claims for unemployment. Sixteen (16) percent of all owners reported job openings they could not fill in the current period (down 4 points), a negative signal for the unemployment rate. Nine percent reported using temporary workers, down 6 points from July. Most of the jobs “created” will likely be dominated by part-time workers. Job creation plans rose 7 points to a net 16 percent planning to increase total employment, the best reading since January 2007 and historically a very strong reading. If this reading is not a fluke, it signals a substantial resumption of hiring in the coming months. Hopefully, the September survey will validate the August readings and reports of actual hiring will turn positive.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months plunged 17 percentage points to a negative 24 percent, the second steepest monthly decline on record. The net percent of owners expecting higher real sales volumes surged 8 points to 15 percent of all owners (seasonally adjusted), a new high for this recovery. The pace of inventory reduction continued, with a net negative 11 percent of all owners reporting growth in inventories (seasonally adjusted), 1 point worse than July. For all firms, a net negative 1 percent (unchanged) reported stocks too low, an historically “satisfied” reading. The net percent of owners planning to add to inventory stocks rose 3 points to a net 2 percent, in line with an improvement in expectations for sales growth.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose 3 points to 57 percent. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 25 percent. Seven percent characterized the current period as a good time to expand facilities (down 2 points). The net percent of owners expecting better business conditions in six months was a net negative 10 percent, 4 points worse than July.
INFLATION
Seventeen (17) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 3 points), and 18 percent reported price increases (up 1 point). Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, down 2 points. Twenty-one (21) percent plan on raising average prices in the next few months (up 5 points), and 3 percent plan reductions (unchanged). Seasonally adjusted, a net 20 percent plan price hikes, up 5 points. Not much pressure on prices over the past few months, but owners plan to try to raise prices in the coming months to address degraded profit performance.
EARNINGS AND WAGES
Earnings trends took a hit in August with the major softening in sales, falling 13 points to a negative 35 percent. Five percent reported reduced worker compensation and 21 percent reported raising compensation, yielding a seasonally adjusted net 15 percent reporting higher worker compensation (down 1 point). A net seasonally adjusted 12 percent plan to raise compensation in the coming months, up 1 point. Overall, the compensation picture remained at the higher end of experience in this recovery. While historically weak, it is consistent with the macro reports about weak growth in income and compensation. Going forward, the rising cost of health care will drive compensation, not gains in take home pay except for firms that drop and give the dollars to the employees to purchase individual insurance.
CREDIT MARKETS
Seven percent of the owners reported that all their credit needs were not met, up 2 points from July. Twenty-nine (29) percent reported all credit needs met, and 49 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem compared to 23 percent citing taxes 21 percent regulations and red tape and17 percent citing weak sales. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point and historically very low. A net 4 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), down 2 points from July. The average rate paid on short maturity loans was 5.4 percent, about where it has been stuck for years. The one-year Treasury has paid about 0.2 percent over the same period. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 6 percent (more owners expect that it will be “harder” to arrange financing than easier), 2 points better than July but the second most favorable reading since 2006.
COMMENTARY
Overall, the Index of Optimism says the small business sector is going nowhere and that’s what it feels like. Consumer sentiment is falling so there is no wind in the sails of the consumption barge. It floats, but no speed. The Reuters/University of Michigan survey puts support of government policies at single digits. Owner uncertainty about government economic policy ranked in their top five business problems, no change on that front and as confusing as ever. The PMI held at the 55 level, but the jobs component fell which was a surprise. Private construction was up 10 percent year over year, and that could mean more jobs in construction for small businesses.
Owners reported lousy performance in the past few months with employment cuts, falling sales and profits, no ability to raise prices, and weak sales the top business problem for 1 in 5 employers. In particular, spending on services (70 percent of consumption) is very sluggish, up 0.5% year over year and declining at a 1.5% annual rate in July. This is where jobs are generated. Disposable income is up only 0.8% year over year, so no support for spending there. The savings rate is very low again therefore not much room to support more spending with less saving. Durable goods spending has posted strong growth, but this are doesn’t produce many new jobs.
Yet, job creation plans for the next few months surged (after seasonal adjustment) and plans to make capital outlays and expand inventory holdings improved as well. While more owners expect the economy to sink further over the next six months than improve, there was a surge in expectations for gains in real sales volumes at their own companies. This is paradoxical at the macro level, although with differing regional economies, possible.
Financial markets are glued to Syria, but that will have little impact on the real economy nor will Federal Reserve “tapering” have a noticeable impact on the real side. Financial markets (where trading, not investing, dominates) will see more volatility. If tapering occurs, it will fall on Treasury purchases, not MBS. The market is a bit short of Treasuries for doing business anyway, so any reduction in the $85 billion in purchases will fall on Treasury bonds. Overall, the NFIB survey holds little promise of any more than the 2 percent growth we have experienced since the recovery began in 2009. That means unemployment will remain high and if the rate falls, it is likely that a decline in the labor force will be the cause, not job creation unless owners really mean what they said in the August survey.
This survey was conducted in August 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 19percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2013, the NFIB retains ownership. All Rights Reserved.
