NFIB: Optimism Index increased only 0.2 points last month

Bill Dunkelberg

The Index of Small Business Optimism was basically unchanged in September, rising only 0.2 points, this after an August gain of only 0.5 points. So the Index remains stuck at a below average reading of 96.1. Owners didn’t seem to be overly concerned about the antics of the stock market, as optimism did not fall. However financial markets did not offer any encouragement to owners, instead providing volatility that only a trader could like. This produces uncertainty.

Overall, a solid improvement in hiring activity. There was no evidence in the NFIB data that job creation slacked off sharply from June and July, each with 245,000 jobs. Reported job creation returned to its best level of the year, with owners adding a net 0.18 workers per firm in recent months, up 0.05 from August. Fifty-three percent reported hiring or trying to hire (down 3 points), but 45 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, down 1 point after a cumulative 3 percentage point decline over the past few months. Twenty-seven percent of all owners reported job openings they could not fill in the current period, down 2 points from the highest reading for this year. Highly correlated with the unemployment rate, little change is expected. A net 12 percent plan to create new jobs, down 1 point. Historically this is a solid number and supportive of positive job creation.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 2 percentage points to a net negative 1 percent. Expected real sales volumes posted a 6 point decline, falling to a seasonally adjusted net 1 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 0 percent (seasonally adjusted), up 1 point. The net percent of owners viewing current inventory stocks as “too low” was unchanged a net negative 5 percent (a 1 point improvement), 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 2 points to a net 3 percent, a positive move but not strong. With weak expectations for sales and business conditions, prospects for strong inventory investment are poor.

Fifty-eight percent reported capital outlays, unchanged from August. Seven percent acquired new buildings or land for expansion (unchanged) and 14 percent spent money for new fixtures and furniture (up 1 point). Overall, capital spending was basically flat. The percent of owners planning capital outlays in the next 3 to 6 months gained 1 point to 25 percent, not a strong reading historically but among the better in this expansion. Of the 51 percent of owners who said it was not a good time to expand (up 1 point), 22 percent (up 2 points) blamed the political environment.

Seasonally adjusted, the net percent expecting better business conditions rose 2 points to a net negative 4 percent, a rather negative outlook for “expansion”. The seasonally adjusted net percent expecting higher real sales fell 6 points to a net 1 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.

Fifteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 1 point), and 15 percent reported price increases (up 1 point). Seasonally adjusted, the net percent of owners raising selling prices was 1 percent, unchanged. 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. Seasonally adjusted, a net 13 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 of it, not less.

Earnings trends, posted a 2 point gain, improving to a negative 13 percent. Since July, reports of positive earnings trends have improved by 6 percentage points, possibly driven by lower fuel prices. A seasonally adjusted net 23 percent of owners reported raising worker compensation, unchanged and 2 points below the expansion high reading reached in January and May. The net percent planning to increase compensation rose 3 points to 16 percent, still historically strong for this recovery.

Two percent of owners reported that all their borrowing needs were not satisfied, a record low. Thirty percent reported all credit needs met, and 57 percent, a record high, explicitly said they did not want a loan. Twenty-nine percent of all owners reported borrowing on a regular basis, down 4 points. The average rate paid on short maturity loans fell 60 basis points to 4.8 percent. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, a 1 point improvement. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to substantially step up their borrowing and spending.

The Federal Reserve decided that doing nothing was the best thing for jobs – or for “global concerns” or to make LeGarde and the World Bank happy along with all of the equity traders even though the evidence suggests that the Fed can’t impact employment significantly. None-the-less, Chairman Yellen put “jobs” at the top of her policy priority list. Meanwhile, banks can only lend to the best borrowers at the Fed’s low rate structure, believing that the cost of funds will rise and squeeze out profitability before rates can be reset. Savers aren’t interested in lending their money (depositing at banks, etc.) at these low rates. Trillions of dollars of low yield Treasury securities issued over the past 7 years guarantee sub-par returns to savers and investors for the next decade. Interest income is billions below what “normal” rates would deliver and the Fed continues to hoard trillions of dollars in riskless securities that the market would love to have. Cheap money induces investors to make investments that wouldn’t pass muster in a normal economy. Not a helpful set of outcomes.

Owners make it clear that credit availability and costs are not holding them back. Indeed, another NFIB survey shows that 41 percent are significantly distressed about Fed indecisiveness and another 34 percent are “somewhat” concerned.

Consumer sentiment (University of Michigan) fell in September. Nearly 60 percent reported hearing unfavorable news about the economy. Far more consumers think government policy is “poor” than think it is “good” (20 percent vs 44 percent). Over 20 percent of owners who think it is a bad time to expand blame “political uncertainty. Uncertainty is the enemy of economic growth.

Growth has displayed a “herky jerky” pattern, GDP from 0.6 to 3.9 percent, jobs from 245,000 down to 143,000, stocks gyrating as gamblers adjust their bets. In the meantime, economic policy is in disarray, including the Fed’s. What a mess. Only the strongest private sector can continue to produce growth in this environment. If we are growing at a 4 percent rate (second quarter), the strength isn’t coming from the small business sector.

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