NFIB October 2016 Report: Small Business Optimism Index increases slightly
The Index of Small Business Optimism rose 0.8 points to 94.9, still in the 94 range that has bound it for the past five months and well below the 42 year average of 98. It has been a below average recovery. Five of the 10 Index components posted a gain, 3 declined and 2 were unchanged. The fourth quarter though looks to be weaker with the Uncertainty Index hitting a 42 year high, and as prospects for a “civil” relationship between the Democrats and the Republicans fade regardless of who wins the election. The election turmoil is definitely having an impact. Of those who think the current period is a bad time to expand substantially (56 percent), a record high 39 percent blame the political climate, second only to economic conditions.
LABOR MARKETS
Fifty-five percent reported hiring or trying to hire (down 3 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Twenty-eight percent of all owners reported job openings they could not fill in the current period, up 4 points. This indicates that labor markets remain tight and the unemployment rate will remain steady at what many call “full employment”. Fifteen percent reported using temporary workers, unchanged. A seasonally adjusted net 10 percent plan to create new jobs, unchanged from September. Job creation plans were strongest in manufacturing and professional services.
CAPITAL SPENDING
Fifty-seven percent reported capital outlays, up 2 points from September, but trending down on a quarterly basis. The percentage of owners making an outlay peaked for this recovery in July 2015 at 61 percent, revisited that percentage in January but has faded since. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 27 percent, the second highest reading in the recovery, but historically weak. Seasonally adjusted, the net percent expecting better business conditions fell 7 percentage points to a net negative 7 percent. The seasonally adjusted net percent expecting higher real sales fell 3 points to 1 percent of all owners, a very weak showing.
PROFITS AND WAGES
A seasonally adjusted net 25 percent of owners reported raising worker compensation, up 3 points. The net percent planning to increase compensation rose 5 points to 19 percent. The strongest reading in this recovery occurred in January with a net 27 percent reporting higher employee compensation. The lowest was a net negative 2 percent in 2009, leaving this month’s reading among the highest in the recovery. Earnings trends deteriorated 1 point to a net negative 21 percent reporting quarter on quarter profit improvements.
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 deteriorated 1 percentage point to a net negative 7 percent. Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 3 points to a net 1 percent of owners, a weak showing. With weak sales prospects, hiring and inventory investment will likely be weak going forward.
The net percent of owners reporting inventory gains rose 1 point to a net negative 3 percent (seasonally adjusted), still negative but better than the negative 4 point average for the 9 months prior. The net percent of owners viewing current inventory stocks as “too low” improved 3 points to a net negative 4 percent, reflecting inventory reductions facilitated by stronger consumer spending in Q3. The net percent of owners planning to add to inventory improved 9 points to a net 2 percent, a strong reversal.
INFLATION
The lack of “inflation” on Main Street continues to contribute to the Federal Reserve’s frustration. The net percent of owners raising average selling prices was a net 2 percent (up 3 points); this is in contrast to a net 70 percent raising average prices in the 1970s. Clearly the small business sector can produce “inflation”. Thirteen percent of owners reported reducing their average selling prices in the past three months (down 1 point) and 13 percent reported price increases (up 1 point). Seasonally adjusted, a net 15 percent plan price hikes (down 3 points). But for most small business owners, growth is too low to put enough pressure on supply to produce price increases, with the exception of new houses where supply is insufficient and prices are rising.
CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied, down 2 points from September. Twenty-nine percent reported all credit needs met (down 3 points), and 53 percent explicitly said they did not want a loan, up 4 points. However, including those who did not answer the question, presumably uninterested in borrowing, 67 percent of owners have no interest in borrowing.
Record numbers of firms remain 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, 21 percent citing regulations and red tape, and 15 percent the availability of qualified labor. Twenty-eight percent of all owners reported borrowing on a regular basis (down 4 points).
The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, up 1 point.
COMMENTARY
The first guess at GDP growth for Q3 was 2.9 percent, a marked improvement over the prior four quarters. But prospects for the fourth quarter are not promising, auto sales are weakening, housing supply is constrained, inventories are still a bit excessive, and consumer sentiment has been declining. Businesses are not inclined to be investing in new plant and equipment, not knowing where already high marginal tax rates might go.
The Federal Reserve passed on a November rate hike as expected even though 9 of the 12 regional banks requested an increase and two FOMC members dissented. The risk of a market disruption in the final week of voting for a president is one worth avoiding, delaying for 30 days won’t matter although delaying for eight years – that’s another matter. The Fed’s monthly (morphing into yearly) delays have been a major source of uncertainty for owners and market participants as well. If the Fed gurus don’t know which way the economy is headed, who does?
The election is days away, and that will likely change the amount of uncertainty in the economy. This will convert “uncertain” and “don’t know” views into firmer views, bad or good, and trigger actions to protect against anticipated policies or take advantage of the expected improvement in the economy. While new uncertainties will likely emerge, the level of uncertainty should diminish. Stay tuned for the November survey which will show the response to the election outcome.
Bill Dunkelberg is Chief Economist for the National Federation of Independent Business
