NFIB September 2016 report: Business optimism dips lower before election

Bill Dunkelberg

Strong gain in expected business conditions offset by weak inventories

The net percent of small business owners who expect better business conditions in the next six months jumped 12 points last month, according to the NFIB Small Business Economic Trends Report (SBET), released today, but that gain was erased by significantly weaker inventories and hard-to-fill job openings.

Expected business conditions over the next six months was the biggest mover in this month’s survey, climbing out of negative territory back to zero with a 12-point gain.

“We improved from awful to bad,” said Juanita Duggan, NFIB President and CEO. “The bottom line is that small business owners are deeply uncertain about the future, and that is affecting their decisions.”

The NFIB Index of Small Business Optimism dipped 0.03 points in September for the second consecutive month. Increased inventories fell seven points while hard-to-fill job openings plunged six points landing at 24 percent. Six of the 10 indices dropped, washing away the rise in expected business conditions.

According to NFIB Chief Economist Bill Dunkelberg, small business owners won’t be hiring or building inventories – both of which signify confidence in the economy – until something changes in Washington.

“It is quite clear that the top issues for small-business owners will not be addressed this year,” said Dunkelberg. “The presidential election is so divisive that it offers little promise of a bipartisan effort to deal with any of these important issues.”

Fifty-eight percent reported hiring or trying to hire (up 2 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Seventeen percent of owners cited the difficulty of finding qualified workers as their single most important business problem. This issue ranks second behind taxes but tied with the cost of regulation and red tape. Twenty-four percent of all owners reported job openings they could not fill in the current period, down 6 points from August when it reached the highest for this recovery. A seasonally adjusted net 10 percent plan to create new jobs, up 1 point from August.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 3 percentage points to a net negative 6 percent. Reports of stronger consumer spending in the government numbers did not improve reports of sales gains.

Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 5 points to a net 4 percent of owners, a weak showing. With weak sales prospects, hiring and inventory investment will be weak.

The net percent of owners reporting inventory gains fell 4 points to a net negative 4 percent (seasonally adjusted). Selling to customers out of excess inventory stocks does not add to GDP. The net percent of owners viewing current inventory stocks as “too low” deteriorated 5 points to a net negative 7 percent, indicating weak demand for new inventory spending. The net percent of owners planning to add to inventory fell 8 points to a net negative 7 percent, not a strong picture. 

Fifty-five percent reported capital outlays, down 2 points from August following a 2 point decline in July. The percentage of owners making an outlay peaked in July 2015 and most recently in January 2016 at 61 percent, but has faded since. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 27 percent, the second highest reading in the recovery, but historically weak. The small business sector remains in “maintenance mode”. Seasonally adjusted, the net percent expecting better business conditions gained 12 percentage points to a net 0 percent, an improvement, but to a still poor reading. The seasonally adjusted net percent expecting higher real sales rose 5 points to 4 percent of all owners, a very weak showing. Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment as prospects for sales and profits are poor.

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 negative 1 percent (down 4 points), this in contrast to a net 70 percent raising average prices in the 1970s. Clearly the small business sector can produce “inflation”. Fourteen percent of owners reported reducing their average selling prices in the past three months (unchanged), and 12 percent reported price increases (down 4 points). Nineteen percent plan on raising average prices in the next few months (up 2 points) while only 3 percent plan reductions (down 1 point). Seasonally adjusted, a net 18 percent plan price hikes (up 3 points).

A seasonally adjusted net 22 percent of owners reported raising worker compensation, down 2 points. The net percent planning to increase compensation was unchanged at 14 percent. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem rose 2 points to 17 percent, second on the list of problems behind taxes, and tied with the cost of regulations and red tape.

Earnings trends improved 3 points to a net negative 20 percent reporting quarter on quarter profit improvements. The inability of firms to raise prices limits the extent to which firms can raise worker compensation as they face shortages of some types of labor.

Six percent of owners reported that all their borrowing needs were not satisfied, up 2 points from August. Only 1 percent reported that financing was their top business problem. Thirty-two percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans rose 100 basis points to 6.2 percent. Overall, loan demand remains historically weak, owners can’t find many good reasons to borrow and invest, even with abundantly cheap money. The net percent of owners expecting credit conditions to ease in the coming months was a negative 7 percent, 2 points worse than August.

The Federal Reserve has started its usual “hide the rate hike” game, sending observers looking under every rock of data to see if there are 25 basis points underneath. Most of the “rocks” look like pebbles, there’s not a lot of growth in the economy. The Fed thinks it is the determining force shaping interest rates, not markets, a very troubling view. One Fed president said “Long-run expectations for policy rates provide an anchor to long-run interest rates,” continuing with “So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path.” In other words, if the Fed says it will keep short rates low, long rates will be low as well.

Acknowledging that artificially keeping rates low is not easy, Fed chair Yellen said that if they run out of government bonds to buy, the Fed could start buying stocks and other uninsured bonds. Taken to the limit, the Fed could own all quality financial assets that have a yield, leaving the private sector with cash. The absurdity of this is obvious, yet the Fed talks about such policies as if they are a normal course of action. The demand for so-called riskless assets, government debt, is strong. The Fed is hoarding trillions of dollars of these assets and keeps buying more, and so yields stay low. If the Fed returned these assets to the private sector (i.e. sold them back), interest rates would rise. Fed policies have prompted firms to spend their resources on mergers and stock buybacks and dividends, not real investment. And, with fiscal policy M.I.A., everything is on hold until the elections bring more clarity – good or bad.

Even more confusing is the Fed’s persistent belief that their current policy track is working, viewing debt purchases as supportive of growth rather than a major source of the uncertainty that blunts economic activity. Clearly the stock market loves the Fed, but bloated stock values are not real productive wealth which is created by real investment in plant, equipment, research and infrastructure, weak in this recovery. Even housing with low mortgage rates has not performed up to expectation based on demographics. It has not occurred to the Fed that what meager growth we have had has occurred in spite of government policy, not because of it. The private sector continues to perform poorly in light of the barriers that governments at all levels throw up in its path.

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