Small Business Economic Trends - February 2014
SUMMARY
OPTIMISM INDEX
The Small Business Optimism Index increased by 0.2 points to 94.1. Only three of the Index components improved, two were unchanged, and five were lower indicating that the small business half of the economy was still adding little to growth beyond that needed to support population growth. Technically, January marks the third monthly increases in a row, but unfortunately, each monthly increase is lower than the last. But while improvements are losing steam, the increase still beats a decline.
LABOR MARKETS
NFIB owners increased employment by an average of 0.12 workers per firm in January (seasonally adjusted), half the December reading, but a solid number. While these numbers look historically good, the problem is that there are many fewer firms. Seasonally adjusted, 13 percent of the owners (down 1 point) reported adding an average of 3.7 workers per firm over the past few months. Offsetting that, 11 percent reduced employment (up 1 point) an average of 3.3 workers, producing the seasonally adjusted net gain of 0.12 workers per firm overall. Forty-six percent of the owners hired or tried to hire in the last three months and 38 percent (83 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Job creation plans surprised on the upside, rising 4 points to a net 12 percent. This is the best reading since September 2007. Twenty-two percent of all owners reported job openings they could not fill in the current period (down 1 point). This suggests that the unemployment rate did not change much in January. Fourteen percent reported using temporary workers, unchanged from December.
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 deteriorated 2 points to a net negative 10 percent. Fourteen (14) percent still cite weak sales as their top business problem, but this is the lowest since June 2008. The monthly peak was 34 percent, set in early 2010. The net percent of owners expecting higher real sales volumes rose a huge 7 points to 15 percent of all owners on top of a 5 point gain in December This puts this indicator into “normal” territory for a growing economy – hope they are right!
The pace of inventory reduction continued, with a net negative 4 percent of all owners reporting growth in inventories (seasonally adjusted). The assessment of the adequacy of current inventory stocks improved a bit but remained negative after a streak of favorable views. The net percent of owners viewing current stocks as “too low” improved 3 points to a net negative 2 percent. The net percent of owners planning to add to inventory stocks was a net negative 3 percent (down 1 point), indicating little appetite to add to stocks already viewed as excessive relative to sales expectations.
CAPITAL SPENDING
Fifty-nine (59) percent reported outlays, down 5 points but an improving number historically as December numbers were boosted by the expiration of generous expensing rules. The “declines” simply reflect the impact of government rule changes, and not a weakening of fundamental spending. These “temporary” breaks don’t change the amount of spending long term, just move it around in time. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 24 percent. Eight percent characterized the current period as a good time to expand facilities (down 2 points). Of those who said it was a bad time to expand (59 percent), 27 percent still blamed the political environment, suggesting that at least for these owners, Washington is preventing their spending on expansion.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was a net 2 percent, up 3 points. Twenty-five (25) percent plan on raising average prices in the next few months (unchanged), 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 2 percent reporting higher actual prices.
PROFITS AND WAGES
Earnings trends worsened 5 points in January, falling to a net negative 27 percent (net percent reporting quarter to quarter earnings trending higher or lower). Three percent reported reduced worker compensation and 20 percent reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (unchanged), the best readings since 2008. A net seasonally adjusted net 11 percent plan to raise compensation in the coming months, down 2 points from December.
CREDIT MARKETS
Five percent of the owners reported that all their credit needs were not met, 1 point above the record low. Thirty-one (31) percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 24 percent citing taxes, 22 percent citing regulations and red tape and 14 percent citing weak sales. Thirty-one percent of all owners reported borrowing on a regular basis, up 1 point but only 3 points above the record low. A net 6 percent reported loans “harder to get” compared to their last attempt, 1 point improvement from December. The average rate paid on short maturity loans was steady at 5.6 percent.
COMMENTARY
Last year finished with a fair uptick in economic activity, but probably not as strong as the “headline” GDP numbers made it look. Overall, GDP was up only 1.9 percent in 2013, down from 2.8 percent in 2012. But the second half of the year posted above trend growth numbers, a rare showing in our 5 year recovery. Exports were strong, that’s good for manufacturing output, but less so for jobs – productivity looking good. A huge share of the growth was in inventory building, nice while it is happening, but usually followed by sub-normal production later as excess stocks are worked off. That will depress activity in the first half of 2014 and keep some prices down.
Employment starts 2014 over a million below its peak in January 2008 and prospects for a major recovery in jobs are not good. Missing from the jobs numbers and GDP are construction workers. While housing starts have been improving, it has been at a very slow pace, leaving starts a half a million below what was thought to be trend, though some starts are “bigger” than others, multifamily starts absorb a lot of households per start. NFIB labor market indicators have recently seen a return to normal but not expansion levels, encouraging in that reversals are now less likely. The average increase in workers per firm has risen in recent quarters, indicating new job creation. However, there are far fewer firms hiring workers than there were in 2007 and many of those still in existence have downsized.
Tapering has started, but the impact on owners’ views about loan markets has not been impacted, nor was it when QE was started. Low rates are nice, but one must repay a loan which means the loan proceeds must be productively deployed and opportunities to do so in this recovery have been scarce for small businesses. Nearly two-thirds of owners continue to express no interest in a loan and historically low percentages complain about lack of access. QE didn’t have much of an impact on jobs and tapering probably will not either, it’s a “big bank” event, trading the yield curve, not making business loans.
As noted last time, economic policy will be dominated by vote getting, not sensible strategies to improve economic growth and job creation, to wit, with a 20 percent teen unemployment rate, liberal policy makers want to raise the minimum wage. This will, barring a surge in economic activity that raises the values of these workers, undoubtedly worsen unemployment and job opportunities in the future.
This survey was conducted in January 2014. A sample of 10,799 small-business owners/members was drawn. One thousand eight hundred and sixty-four (1,864) usable responses were received – a response rate of 17 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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