May 2015 Report: Ecomomy is moving ahead, but at uninspiring pace

SUMMARY

OPTIMISM INDEX

The Index of Small Business Optimism increased 1.4 points to 98.3 in spite of 5 months of lousy growth. May is the best reading since the 100.4 December reading but nothing to write home about. The 42 year average is 98.0, a bit lower than the 99.5 average through 2007. Eight of the 10 Index components posted improvements. Overall, the Index remained in a holding pattern, a few points below the pre-recession average, although at the 42 year average, and showing no tendency to “break out” into a stronger pattern of economic growth.

LABOR MARKETS

Small businesses posted another decent month of job creation in May, a string of 5 solid months of job creation. On balance, owners added a net 0.13 workers per firm over the past few months. Fourteen percent reported raising employment an average of 2.7 workers per firm while 12 percent reported reducing employment an average of 3 workers per firm. Fifty-five percent reported hiring or trying to hire (up 2 points), but 47 percent, reported few or no qualified applicants for the positions they were trying to fill. Thirteen percent reported using temporary workers. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 2 points, revisiting the February reading, and the highest reading since April 2006.

INVENTORIES AND SALES

The seasonally adjusted net percent of all owners reporting higher nominal sales in the past 3 months compared to the prior 3 months rose a stunning 11 points to a net 7 percent. Eleven percent cited weak sales as their top business problem (unchanged). Expected real sales volumes posted a 3 point decline, falling to a net 7 percent of owners expecting gains, after a 5 point decline in January and February, a 2 point decline in March and a 3 point decline in April. Overall, expectations are not showing a lot of strength.

The net percent of owners reporting inventory increases fell 4 points to a net negative 5 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” improved 1 point to a net 0 percent. The reductions were apparently a result of unexpectedly strong improvement in sales trends, and this left balance in the assessment of current stocks. The net percent of owners planning to add to inventory was unchanged at a net 4 percent, in sympathy with the more widespread reduction in stocks. Inventory investment might have been even stronger in light of the liquidation had expectations for real sales gains improved rather than softened.

CAPITAL SPENDING

Fifty-four percent reported outlays, down a surprising 6 points. Of those making expenditures, 39 percent reported spending on new equipment (up 4 points), 21 percent acquired vehicles (down 4 points), and 13 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion and 12 percent spent money for new fixtures and furniture, both figures up 1 point. These numbers suggest, overall, a back-tracking of investment spending. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 points to 25 percent, not a strong reading historically but among the best in this expansion.

INFLATION

Seasonally adjusted, the net percent of owners raising selling prices was 6 percent, up 4 points but still a “tame” reading. However, if the strength in sales gains persists, owners will have more opportunities to raise prices. Seasonally adjusted, a net 17 percent plan price hikes (unchanged). The economy has grown too slowly to support widespread price hikes.

EARNINGS AND WAGES

Earnings trends posted an unexpected 9 point gain, posting a reading of a net negative 7 percent reporting higher earnings, this on top of a 6 point improvement in April. This is the best reading since October 2005. The main factor improving the earnings trend was the decline in the percent reporting lower earnings quarter on quarter.

Reports of increased labor compensation rose a point to a net 25 percent of all owners. Reports of gains this frequent occurred in December 2014 and January of this year, but those are the highest readings since January 2008 when employment last peaked before the recession. Labor costs continue to put pressure on the bottom line, but fuel prices are down a lot and sales trends much stronger. This should begin to show up in wage growth, although rising benefits offset potential increases in take-home pay. A seasonally adjusted net 14 percent plan to raise compensation in the coming months (unchanged). The reported gains in compensation are still in the range typical of an economy with reasonable growth.

CREDIT MARKETS

Four percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically low. Thirty percent reported all credit needs met, and 50 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. Only 2 percent reported that financing was their top business problem (unchanged). In the Great Recession, no more than 5 percent cited credit availability and interest rates as their top problem (chart) compared to as high as 37 percent in the Volcker era. If credit availability is really a problem, owners let it be known. Twenty-nine percent of all owners reported borrowing on a regular basis, down 1 point.