January 2016 Report: After modest gain last month, small business optimism takes a stumble
NFIB survey shows small business owners wary of future economic conditions.
The Index of Small Business Optimism fell 1.3 points from December, falling to 93.9. Neither the tumultuous stock market nor the Federal Reserve’s rate hike left much of a mark on small business owners beyond a frown in the Index represented by a further weakening of expectations for business conditions and expected real sales volumes. Those two Index components accounted for most of the decline. The political races have become “cartoonish” and the Fed’s talk about negative interest rates is so foreign to real sector people that they don’t know what to think of it. Actual spending and hiring numbers held up pretty well as the real economy plods forward. However plans to create jobs did fade, but maintained respectable levels (for this recovery). Reports of hard-to-fill job openings rose to expansion-high levels (tighter labor market, lower unemployment rate). Inconsistencies in the BLS job reports reconciled themselves with NFIB (and other) forecasts, growth over two months is about the average achieved over the past year, and that isn’t great.
OPTIMISM INDEX
More owners reported cutting average prices than raising them, not particularly helpful to the Fed which is trying to beat the average inflation rate experienced over the past 20 years. But just why the world’s central banks have decided this is good is not clear. Reports of higher compensation, on the other hand, rose to expansion high levels. More owners reported sales trending down than trending up quarter on quarter and profit trends worsened a bit. Sympathetically, consumer sentiment (University of Michigan) fell to one of the lowest readings in the past 12 months. Overall not strong spending support. Over 40 percent of consumers reported that government was doing a poor job, more than twice as many as think it is doing a good job. Among business owners who characterize the current environment as a bad time to expand. One in 5 cite the political climate as the reason, the second most frequently cited reason after weak sales and a poor economy. These clouds will be with us all year.
LABOR MARKETS
Reported job creation improved in January, with the average employment gain per firm rising to 0.11 workers per firm from -0.07 workers in December. Twelve percent (down 1 point) reported increasing employment an average of 2.8 workers per firm while 11 percent (down 1 point) reported reducing employment an average of 3.9 workers per firm. The size of the average reduction in employment was large after seasonal adjustment, perhaps reflecting abnormal adjustments produced by a shift from abnormally warm weather through December to normal winter weather.
Fifty-two percent reported hiring or trying to hire (down 3 points), but 45 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, down 1 point.
The percent of owners citing the difficulty of finding qualifed workers as their Single Most Important Business Problem was unchanged at 15 percent, number 3 on the list of problems behind taxes and regulations and red tape, the highest reading since 2007. This suggests that employers will face continued wage and benefit cost pressure in order to attract and keep good employees.
Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 1 point and at the highest level for this expansion. This is a solid reading historically and is suggestive of a reduction in the unemployment rate.
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 fell 2 points to a net negative 7 percent. Twelve percent cited weak sales as their top business problem, up 1 points. Overall, this is not a strong sales picture.
Expected real sales volumes posted a 4 point loss, falling to a seasonally adjusted net 3 percent of owners expecting gains. This is well below the average 14 point reading in the first four months of 2015. Owners aren’t expecting a very energetic opening to the year.
The net percent of owners reporting inventory increases was a net negative 2 percent (seasonally adjusted), a 2 point deterioration, perhaps in response to solid but not great consumer spending late in 2015 The net percent of owners viewing current inventory stocks as “too low” improved 2 points to a net negative 2 percent.
The net percent of owners planning to add to inventory fell 2 points to a net negative 1 percent. With weak expectations for sales and business conditions, owners see no need to add to current stocks.
CAPITAL SPENDING
Sixty-two percent reported capital outlays, unchanged from November. Overall, capital spending was much stronger in November and December, reflecting growing certainty that expensing provisions would be renewed. Not only was it renewed, it was made permanent, giving small businesses some much needed certainty. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 26 percent, not a strong reading historically but among the best in this expansion. Seasonally adjusted, the net percent expecting better business conditions deteriorated 7 points to a net negative 14 percent, a very negative outlook for an “expansion”. Clearly, expectations for the economy are not conducive to an improvement in business investment. Although expectations for real sales gains improved sharply, the December reading is much weaker than those posted in the first half of 2015.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was negative 4 percent. Obviously more evidence that the Fed’s policies aimed at producing inflation are not working. It appears that there was a lot of price cutting late in the year to boost sales and reduce inventory.
Seasonally adjusted, a net 16 percent plan price hikes (down 4 points).
EARNINGS AND WAGES
Earnings trends were basically unchanged at a net negative 18 percent reporting quarter on quarter profit improvements. Far more owners are reporting profits lower quarter to quarter than higher.
A seasonally adjusted net 27 percent of owners reported raising worker compensation, up 5 points and the strongest reading since 2007. Reported wage gains are reflecting the growing frequency of reported higher compensation. The net percent planning to increase compensation fell 6 points to a net 15 percent. The gap between the frequency of compensation increases and price increases has become very large, signaling growing pressure on the bottom line. This can be offset by cost cutting (including energy) or raising prices, the latter clearly not operational in the current environment.
The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem was unchanged at 15 percent, #3 on the list of problems behind taxes and regulations and red tape, the highest reading since 2007. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, 1 point above the record low reached in September, 2015. Thirty-five percent reported all credit needs met (up 3 points), and 50 percent explicitly said they did not want a loan. For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 18 percent citing regulations and red tape and 15 percent citing the availability of qualified labor. The allegation that large numbers of real operating firms are being denied credit is clearly not the case. When credit is an issue, owners report it as illustrated by 37 percent reporting credit hard to get in the early 1980s compared to 5 percent today.
Thirty-three percent of all owners reported borrowing on a regular basis, up 2 points. The average rate paid on short maturity loans rose 40 basis points to 5.4 percent. Loan demand remains historically weak, owners can’t find many good reasons to borrow to invest when expectations for growth are not very positive.
The net percent of owners expecting credit conditions to ease in the coming months was a negative 7 percent, a 1 point deterioration. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending. And, banks may be reluctant to make longer term loans at today’s historically low rates, expecting that in the next few years, such loans would become “losers” with sub-par returns as interest rates and the cost of funds (deposits) rise.
COMMENTARY
The Bureau of Economic Analysis reported its first estimate of real GDP growth in 2015 Q4 at 0.7 percent, a very weak performance. The Bureau of Labor Statistics reported job creation in January at about 150,000. December’s number was revised down to 262,000, still more than most analysts, including those with independent data sources. So what are all those workers making? It’s not showing up in GDP. The unemployment rate fell to 4.9 percent but the percent of the adult population with a job remained historically low. The State of the Union address tried to put lipstick on the pig that is our recovery and of course shift the blame for the recession to predecessors. There was little there to lift the spirits of Main Street business owners. The litany was old and worn.
The Small Business Optimism Index fell a bit more than one point, not much of a response to stock market turbulence or the Federal Reserve’s move to raise interest rates. The decline in optimism was accounted for by two important Index components, expected business conditions in six months and expected real sales. These expectations are important determinants of decisions to hire, to expand business operations and to order new inventory, all drivers of economic growth. Fed policy provides liquidity and depresses interest rates but provides no encouragement to owners to spend and produce some “inflation”. Indeed, policy pronouncements convey a sense of desperation which is not supportive of positive expectations for the economy.
The labor market continues to show strength, driven by the core growth in the economy that results from the addition of 3 million new people every year (a missing ingredient to the growth stew in Japan and Western Europe). But uncertainty continues to cloud the future. Politicians are promising “free stuff” but that means less freedom to Main Street that will be expected to pay for it. There is talk of “negative interest rates”, a very foreign and confusing concept to Main Street. Global events are not encouraging, indicative of more confusion and violence to come. The Administration offers little promise that serious economic problems will be dealt with while the avalanche of regulations continues. Overall, it is unlikely that anything will occur that will raise the spirits of small business owners and rekindle the “animal spirits” that are needed to spur economic growth.
