February 2016 Report: Small Business Optimism Hits Two-Year Low
The Index of Small Business Optimism fell 1 point from January, falling to 92.9. None of the 10 Index components posted a gain, six posted small declines, and four were unchanged. Overall, a “ho hum” outcome, confirming that the small business sector is not headed up with any strength, just treading water waiting for a good reason to invest in the future. Spending and hiring plans weakened a bit as expectations for growth in real sales volumes fell. Earnings trends worsened a bit as owners continued to report widespread gains in worker compensation while holding the line on price increases (more firms cut prices than raised them). The political climate continued to be the second most frequently cited reason for the current period being a bad time to expand.
University of Michigan’s Consumer Sentiment Index posted a modest decline, although reported spending for January was reasonably strong. Still, more owners reported sales trending down than up, quarter on quarter. Expectations for future business conditions remained very negative, certainly not supportive of significant increases in hiring or capital spending.
LABOR MARKETS
Reported job creation reversed in February, with an average employment change per firm falling to a decline in employment of -0.12 workers per firm. Eleven percent (down 1 point) reported increasing employment an average of 1.9 workers per firm while 13 percent (up 2 points) reported reducing employment an average of 4.8 workers per firm. The employment question “looks back” over the prior three months, likely reflecting some of the poor GDP performance in the fourth quarter.
Forty-nine percent reported hiring or trying to hire (down 3 points), but 42 percent reported few or no qualified applicants for the positions they were trying to fill. A lack of specific job related skills and a poor work history are disqualifiers that are expected. However, a lack of social skills, appearance, and attitude are deficiencies that the applicant can correct without going back to school or getting more training. Searching for a job will give the applicant a better fix on market wage offers, but in many states the available welfare benefits pay as much as a minimum wage job, eliminating the incentive to take a job and having “on the job” training for a more meaningful career.
The percent of owners citing the difficulty of finding qualified workers as their Single Most Important Business Problem fell 3 points to 12 percent, still number three on the list of problems behind taxes and regulations and red tape, and historically high.
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 1 point, rising to a net negative 6 percent on the back of a solid January consumer spending number. Eleven percent cited weak sales as their top business problem, down 1 point. Overall, this is not a strong sales picture. Expected real sales volumes posted a 3 point loss, falling to a seasonally adjusted net 0 percent of owners expecting gains. This is well below the average 14 point reading in the first three 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 3 percent (seasonally adjusted), a 1 point deterioration. The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 2 percent. The net percent of owners planning to add to inventory was unchanged at a net negative 1 percent. With weak expectations for sales and business conditions, owners see no need to add to current stocks.
CAPITAL SPENDING
Fifty-eight percent reported capital outlays, down 3 points. Overall, capital spending weakened again in February. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 23 percent. Clearly, expectations for the economy are not conducive to an improvement in business investment.
INFLATION
Nineteen percent of the NFIB owners reported reducing their average selling prices in the past three months (up 1 point), and 15 percent reported price increases (up 2 points). Seasonally adjusted, the net percent of owners raising selling prices was negative 4 percent, unchanged from January. Obviously more evidence that the Fed’s policies aimed at producing inflation are not working. Small business owners can respond quickly to changing economic conditions, with a net 30 percent reporting higher selling prices early in 2008 (with oil at $140), then falling 55 percentage points to a net negative 25 percent reporting higher selling prices early in 2009 as the economy plunged into recession. A recovery in spending is the only way to create inflation, with spending demands pressing against short run supply. Zero or negative interest rates are not the answer, creating fear and uncertainty among owners rather than stimulating spending.
EARNINGS AND WAGES
A seasonally adjusted net 22 percent of owners reported raising worker compensation, down 5 points from the expansion high level reached in January. The net percent planning to increase compensation fell 3 points to a net 12 percent. Clearly owners are not passing these costs on through higher prices. Perhaps energy savings are providing some cushion for the adverse impact of higher compensation on the bottom line.
Earnings trends worsened 3 points to a negative 21 percent reporting quarter on quarter profit improvements. Far more owners are reporting profits lower quarter to quarter than higher.
The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem fell 3 point to 12 percent, still number 3 on the list of problems behind taxes and regulations and red tape. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees.
CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied, 2 points above the record low reached in September 2015. Thirty-one percent reported all credit needs met (down 4 points), and 52 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 3 percent reported that financing was their top business problem compared to 21 percent citing taxes, 19 percent citing regulations and red tape and 12 percent citing the availability of qualified labor. 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. The Fed reported that business lending is on the rise, but there is little evidence of this among NFIB’s 350,000 member firms.
Thirty-one percent of all owners reported borrowing on a regular basis, down 2 points. The average rate paid on short maturity loans fell 10 basis points to 5.3 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, unchanged. 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. With a quarter of all owners expecting business conditions to deteriorate, prospects for an improvement in loan demand are low.
COMMENTARY
Monthly management of monetary policy using data subject to substantial revision is inconsistent with the acknowledged lags in policy and not supportive of real growth which requires more policy consistency. Financial markets of course thrive on the variability such policies produce and support a zero interest-rate policy (ZIRP). Meanwhile, compared to 2009, consumer interest income is down cumulatively over $3 trillion dollars, an unhappy side effect of Fed policies. Low interest rates are great if they occur in an economy that presents investment opportunities. This happens when the economy is exhibiting solid growth which it has not done in this expansion. The 1983 expansion averaged 650,000 new jobs each quarter compared to 450,000 in this expansion with a labor force 30 percent larger.
NFIB data indicate slow growth in the first quarter following the 1 percent growth rate for the fourth quarter of 2015. The GDPNow forecast from the Atlanta Fed is about 2 percent and the NFIB data basically agree. Owners are very pessimistic about business conditions in the coming months and spending and hiring plans have softened. Political uncertainty remains a major concern and the President does not seem inclined to act favorably on any small business owner’s major concerns. Fed policy communications are very disconcerting, giving an impression that the economy is weak. Too much monthly dithering. All of this generates uncertainty, the enemy of spending and hiring behavior that would move the economy forward at a faster pace.
Bill Dunkelberg is Chief Economist at NFIB. Click here for the full report.
