Small Business Economic Trends - January 2014
SUMMARY
OPTIMISM INDEX
Owner sentiment increased by 1.4 points to 93.9 in December. Adding November’s gain, the Index has improved 2.3 points to end the year well above the January reading of 88.9 – but lower than three other readings over 94 during the year. It’s hard to make that case that the small business sector has made significant progress. The highest reading in this recovery is 95.4, so December is still short. And that reading is 5 points below the pre-recession average of 100 and nowhere close to the readings over 100 that typify recovery periods. On the plus side, half of the 10 Index components posted a gain, and two were unchanged.
LABOR MARKETS
NFIB owners increased employment by an average of 0.24 workers per firm in December (seasonally adjusted), the best reading since February 2006. Forty-eight (48) percent of the owners hired or tried to hire in the last three months and 38 percent reported few or no qualified applicants for open positions. This is not just a “skills” issue, but one of poor attitudes, work habits, timeliness, appearance and expectations, especially among the applicants for lower skill jobs. Twenty-three (23) percent of all owners reported job openings they could not fill in the current period (unchanged), a positive signal for the unemployment rate and the highest reading since January 2008. Fourteen (14) percent reported using temporary workers, up 1 point from November. Job creation plans fell 1 point, falling to a net 8 percent, but maintaining the improved level of plans recorded last month. Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development.
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 was unchanged at a negative 8 percent. Fourteen (14) percent still cite weak sales as their top business problem, but the lowest since June 2008 (the monthly peak was 34 percent in early 2010). The net percent of owners expecting higher real sales volumes rose a solid 5 points to 8 percent of all owners, restoring the September level of positive expectations.
The pace of inventory reduction continued, with a net negative 4 percent of all owners reporting growth in inventories (seasonally adjusted), but 3 points better than November. The net percent of owners viewing current stocks as too low worsened 1 point, falling to a net negative 5 percent, the worst reading since January 2009. The net percent of owners planning to add to inventory stocks was a net negative 2 percent (down 2 points), suggesting little growth in new orders for inventory.
CAPITAL SPENDING
The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four (64) percent reported outlays, the highest level since early 2005. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 26 percent. Ten (10) percent characterized the current period as a good time to expand facilities. Of those who said it was a bad time to expand (61 percent), 31 percent still blamed the political environment, suggesting that at least for these owners, Washington is preventing their spending on expansion. The net percent of owners expecting better business conditions in six months was a net negative 11 percent, 9 points better than November but still dismal.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was a negative 1 percent, down 3 points. Twenty-five (25) percent plan on raising average prices in the next few months (up 2 points), and 3 percent plan reductions (unchanged). Clearly, reality is preventing firms from implementing the price hikes they would like to have. Seasonally adjusted, a net 19 percent plan price hikes (unchanged), a long way from the net negative 1 percent reporting higher actual prices in recent months.
EARNINGS AND WAGES
Earnings trends improved a bit in December, rising 2 points to a net negative 22 percent (net percent reporting quarter to quarter earnings trending higher or lower).
Two percent reported reduced worker compensation and 17 percent reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (up 5 points), the best reading since 2007. A net seasonally adjusted 13 percent plan to raise compensation in the coming months, down 1 point from November. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery.
CREDIT MARKETS
Four percent of the owners reported that all their credit needs were not met, unchanged and an historic low. Thirty-two percent reported all credit needs met, and a record high 55 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, 20 percent citing regulations and red tape and 14 percent citing weak sales. Thirty (30) percent of all owners reported borrowing on a regular basis, up 1 point but only 2 points above the record low. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up a point from November. The average rate paid on short maturity loans was steady at 5.6%. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 7 percent.
COMMENTARY
Economists are raising their forecasts for 2014, but this appears to be based more on “hope” than on any real “change” in the fundamentals. Consumers are a bit more optimistic as are small business owners, but in the context of history, these measures are still weak. The non- manufacturing ISM is continuing to fall as predicted by the NFIB data. Manufacturing is doing well, but there aren’t many jobs to be had there. Total employment remains millions below its peak (January, 2008, the start of the Great Recession) and much of the decline in the unemployment rate is due to workers leaving the workforce, not new job creation. Absent the stunning decline in the labor force participation rate, estimates put the unemployment rate in double digit levels. So, fewer workers making GDP and population growth projected to be the lowest in decades provide a background for continued slow growth.
NFIB’s December survey did provide some positive signals, with the best job creation figure since 2007 and a large increase in the percent of owners reporting actual capital outlays in recent months. The jump of 9 percentage points in December over November suggests that most of the increase in spending came very late in the year. Expectations for real sales growth and for business conditions over the next six months improved substantially over November readings as well. There is not an obvious event that would trigger these gains in the last month of the year, but they are welcome.
The President thinks the way to address the malaise in the economy is to give another $26 billion to the long-term unemployed, shown to produce new jobs by “independent economists” (we know who that is) according to the President. If you borrow $26 billion from China and give it to consumers, it probably does have a positive impact, but does nothing to fix the economy or encourage labor force participation or improve the labor force. Servicing this debt will soon put a real crimp in the government budget. Also proposed are tax breaks in some part of the country for hiring unemployed people (which only benefits employers who were going to hire anyway; it doesn’t produce extra job creation). Add to that a proposed increase in the minimum wage to $10, alleged to create more spending and jobs, proven by real economists (and common sense) to be incorrect. This is further evidence (if we needed it) that economic policy is about politics and winning votes, not improving the economy.
Even with the improved outlook, more owners still expect the economy to be worse mid-year than expect it to be better (27 percent vs 17 percent). Small business owners will also come face to face with the reality of Obamacare as the year progresses. Since it is an election year, the main theme will be addressing the disparities in income and wealth (i.e. tax the rich and increase welfare programs) rather than promoting policies that would create jobs and raise incomes in a growing economy. This year, policy will be all about votes.
This survey was conducted in December 2013. A sample of 3,938 small-business owners/members was drawn. Six hundred thirty-five (635) usable responses were received – a response rate of 16 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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