August NFIB Report
OPTIMISM INDEX
Small Business Optimism Index rose 1.3 points to 95.4. After giving up over 4 points in June, the Index clawed back 1.3 points in July, a familiar theme now, which has produced the most grudging gains in the Index’s history – and still not above the 42 year average of 98.
Expectations for business conditions and real sales gains accounted for half of the net gain in the Index components.
LABOR MARKETS
Job creation picked up in August as the economy left a lousy first quarter behind. Still, growth for this year is still running at the same sluggish 2 percent pace. On balance, owners added a net 0.13 workers per firm in recent months, better than July’s 0.05 but historically a solid reading.
Fifty-six percent reported hiring or trying to hire, but 48 percent (86 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Fifteen percent reported using temporary workers, down 1 point after a 2 percentage point decline last month. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 4 points, regaining the highest reading for this year. A net 13 percent plan to create new jobs, up 1 point after a 3 point gain last month.
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 improved 3 percentage points to a net negative 3 percent. Fourteen percent cited weak sales as their top business problem, up 4 points. Expected real sales volumes posted a 1 point gain, rising to a seasonally adjusted net 7 percent of owners expecting gains, a long way down from the 20 percent reading in December 2014. Overall, not a very positive outlook, but at least positive.
The net percent of owners reporting inventory increases was a net negative 10 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” was unchanged a net negative 6 percent, as weak sales made current stocks look excessive and future sales were not expect to grow much. The net percent of owners planning to add to inventory rose 1 point to a net 1 percent. Clearly small business owners don’t plan on making much of a contribution to inventory accumulation. With weak expectations for sales and business conditions, prospects for strong inventory investment are poor.
CAPITAL SPENDING
Fifty-eight percent reported capital outlays, down 3 points from July. Overall, capital spending faded in August. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 24 percent, not a strong reading historically but among the better in this expansion. The seasonally adjusted net percent expecting higher real sales was 1 point higher at a net 7 percent of all owners. Owner expectations for the economy overall appear to anticipate a continuation of “under-performance”. Investment plans remain historically sub-par, and owners have little interest in borrowing to support investment spending that promises little return.
INFLATION
Fourteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 1 point), and 14 percent reported price increases (down 3 points). There are no signs of inflation bubbling up on Main Street, should be good news, but maybe not for the Fed which seems to want more inflation. Sixteen percent plan on raising average prices in the next few months (down 1 point). Seasonally adjusted, a net 15 percent plan price hikes (down 2 points). Normally, low inflation is good news, but in our up-side-down world, the monetary authority wants more, not less of it.
EARNINGS AND WAGES
Earnings trends reversed, posting a 4 point gain, improving to a negative 15 percent. Far more owners reporting profits lower quarter to quarter than higher.
Reports of increased labor compensation were steady at a net 23 percent of all owners (seasonally adjusted), still shy of the high of 25 percent for this year. Labor costs will continue to put pressure on the bottom line. Fuel prices are falling again, that helps, but firms cannot pass rising labor costs on as they have no pricing power. Regulatory costs are not abating, another negative for the bottom line. A seasonally adjusted net 13 percent plan to raise compensation in the coming months, down 2 points.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, historically low. Thirty-three percent reported all credit needs met, and 49 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 1 percent reported that financing was their top business problem compared to 20 percent citing taxes. In the Great Recession, no more than 5 percent cited credit availability and interest rates as their top problem compared to as high as 37 percent in the Volcker era. Thirty-three percent of all owners reported borrowing on a regular basis, up 3 points. The average rate paid on short maturity loans rose 20 basis points to 5.4 percent. The net percent of owners expecting credit conditions to ease in the coming months was a negative 7 percent, down 2 points.
COMMENTARY
Washington has made no progress dealing with the issues most important to small-business owners and there is little hope that this Administration will take any action. Instead, the management team continues to demonstrate its incompetence, scandals abound, none are resolved, and the President remains steadfast in advocating that we should sink our economy to reduce pollution while the rest of the world does not. There is little hope this will improve, a dreary backdrop for entrepreneurs trying to plan for the future.
Second quarter growth was revised from an initial estimate of 2.3 to 3.7%. Really, a 60% revision?? Might be time to give up that first estimate all together and wait until more of the actual data are in. The “guesses” are not helpful. The Federal Reserve is dithering again. Somehow they think an economy growing at a 2% rate, which is not great of course, demands a 0% interest rate. Apparently they are convinced that the REAL economy will be substantially and adversely impacted by a 0.25% rate hike. Only in their models will this occur, not in the real world, a place they need to visit more often. Undoubtedly there can be some financial market volatility, but the real economy seems to be oblivious to that, it’s the big financial institutions that push for continued asset price inflation. The Federal Reserve’s inaction just contributes to uncertainty on Main Street where maintaining 0% rates makes no sense, and that is confusing. With so much uncertainty coming from “on high”, few want to risk investing in the future.
Consumers agree, optimism fell in August (University of Michigan) and twice as many consumers said government is doing a poor job as said it was doing a good job. Nearly 60 percent reported hearing unfavorable news about the economy. Consumer spending is 70 percent of the economy, uncertainty here slows spending and growth.
Clearly, from Main Street, there is no basis to expect dramatic second half growth as July and August are already unimpressive. Perhaps the large firms will “carry the water”, but with recessions springing up around the globe, this is unlikely. So the small business sector will continue plodding forward, little risk of recession but little risk of a boom as well.
