June 2015 Report: Small Business Economic Trends Small Business Takes Significant Hit In June

Bill Dunkelberg

OPTIMISM INDEX

The Small Business Optimism Index fell 4.2 points to 94.1, likely in response to five months of lousy growth. The 42 year Index average is 98.0, while the pre-recession average is 99.5 (1974-2007). This leaves the current reading 4 points below the overall average, a deficiency of 40 net positive percentage point responses to the Index’s 10 component questions. While this is not a recession signal, it is a clear sign that economic growth on Main Street is not set for a strong second half. Nine of the 10 Index components fell and 1 was unchanged from last month. Declines in spending plans accounted for 30 percent of the Index decline, and weaker expectations for real sales and business conditions another 20 percent. The deterioration in earnings trends accounted for about a quarter of the decline.

LABOR MARKETS

It looks like small businesses “hired in May and then went away”. So, small businesses took a breather from job creation in June after a string of five solid months of job creation. On balance, owners added a net -0.01 workers per firm in recent months, essentially zero. Ten percent reported increasing employment an average of 3.2 workers per firm while 12 percent reported reducing employment an average of 3.3 workers per firm.

Fifty-two percent reported hiring or trying to hire (down 3 points), but 44 percent reported few or no qualified applicants for the positions they were trying to fill. Eighteen percent reported using temporary workers, up 5 points. Twenty-four percent of all owners reported job openings they could not fill in the current period, down 5 points, after reaching the highest level since April 2006 in February. A net 9 percent plan to create new jobs, down 3 points and the lowest reading since September 2014.

INVENTORIES AND SALES

After an exciting surge in May, the net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months fell 9 points to a net negative 6 percent. Ten percent cited weak sales as their top business problem, down 1 point. Expected real sales volumes posted a 3 point decline, falling to a net 4 percent of owners expecting gains, a long way down from the 20 percent reading in December 2014.

The net percent of owners reporting inventory increases rose 5 points to a net 0 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” fell 4 points to a net negative 4 percent. Overall, stocks are viewed as excessive, however, owners in the “shale states” disagree, stocks are too low (see below). The net percent of owners planning to add to inventory fell to a net negative 4 percent, an 8 point decline, in sympathy with the more widespread reduction in stocks, weaker sales trends and weaker sales expectations.

CAPITAL SPENDING

Fifty-eight percent reported outlays, up 4 points. There is no evidence of a pickup in capital spending beyond “pick’emup” trucks. The Ford F150 is the top selling vehicle with a price tag above $50,000. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 23 percent, not a strong reading historically but among the better in this expansion. Owner expectations for the economy appear to be for a continuation of “under-performance”. Consequently, investment plans remain historically sub-par and owners have little interest in borrowing to support investment spending that promises little return.

INFLATION

Seasonally adjusted, the net percent of owners raising selling prices was 5 percent, down 1 point and a weak reading. There are no signs of inflation bubbling up on Main Street. Seasonally adjusted, a net 18 percent plan price hikes (up 1 point). But reports of actual hikes (net of reductions) suggest that the economy has grown too slowly to support widespread price increases.

EARNINGS AND WAGES

If you can’t raise prices, and labor costs are rising, earnings can’t be very good. Earnings trends posted a 10 point decline, reversing last month’s surprising improvement and returning to a more “normal” reading for the recovery. A net negative 17 percent reported higher earnings.

Reports of increased labor compensation fell 4 points to a net 21 percent of all owners (seasonally adjusted), lower but still a good reading. Labor costs continue to put pressure on the bottom line. A seasonally adjusted net 11 percent plan to raise compensation in the coming months, the lowest reading since October, 2013 (down 3 points). Official reports of hourly wages suggest that most of these gains are being absorbed by “benefits”, as little is getting through to take home pay.

CREDIT MARKETS

Five percent of owners reported that all their borrowing needs were not satisfied, historically low. Thirty-two percent reported all credit needs met, and 49 percent explicitly said they did not want a loan. For most of the recession, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow. But May and June readings suggest that the credit appetite of owners might be increasing. Thirty-one percent of all owners reported borrowing on a regular basis, up 2 points. The average rate paid on short maturity loans rose 20 basis points to 5.0 percent, just above last month’s record low reading. Loan demand remains historically weak but is showing some signs of life. The net percent of owners expecting credit conditions to ease in the coming months was a negative 4 percent, unchanged. 

COMMENTARY

The President continues to push regulations to pay people more in higher wages, more overtime, health insurance, etc. However, he does not pursue policies that help increase productivity. Higher pay with the same output means inflation or unemployment or both, neither being good for workers or businesses.

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