Small Business Economic Trends - August 2012
Summary
OPTIMISM INDEX
The Optimism Index gave up 0.2 points, falling to 91.2. Owner optimism remains at recession levels and has stayed in a recession zone for years, oscillating between 86.5 (in July 2009) and 94.5 (February 2012) since the recession officially ended in June 2009. Prior to 2008, the Index averaged 100, significantly above the current reading. The Index has averaged 90 in this recovery, now three years old and is the worst recovery period from a recession in the NFIB survey history which began in 1973. Nothing happened in July that would make owners more optimistic about the near- term future.
LABOR MARKETS
Seasonally adjusted, 10 percent of the owners reported adding an average of 3.0 workers per firm over the past three months, but 11 percent reduced employment an average of 2.3. The remaining 79 percent of owners made no net change in employment. Forty-eight (48) percent of the owners hired or tried to hire in the last three months and 38 percent reported few or no qualified applicants for positions. Overall, there was no meaningful job creation beyond that which population growth itself tends to create. The percent of owners reporting hard to fill job openings held steady at 15 percent of all owners after falling 5 points in June from May’s reading. Unfortunate since May was the best reading in 47 months. Job openings are highly correlated with the unemployment rate, so July offers little hope of an improvement. Seasonally adjusted, the net percent of owners planning to create new jobs rose 2 points to 5 percent, a historically weak reading even if improved from June.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months gained 2 points to 54 percent, still failing to get out of the rut they have been stuck in since early 2008. In 2007, an average of 60 percent reported making capital outlays. So, it appears that spending remains in “maintenance” mode. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 21 percent, a dispiriting result. Only 5 percent characterized the current period as a good time to expand facilities (seasonally adjusted) in contrast to 10 percent last December and 28 percent in December 2004, illustrating the current weak reading. The net percent of owners expecting better business conditions in 6 months was a negative 8 percent, a 2 point improvement. A net negative 4 percent of all owners expect improved real sales volumes, down 1 point, and down 16 points from February. Twenty (20) percent reported “poor sales” as their top business problem, down 3 points. Overall, the outlook is not conducive to a lot of new capital spending or hiring.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 4 points, falling to negative 9 percent, this after a 7 point decline in June. Twenty (20) percent still cite weak sales as their top business problem, historically high, but down from the record 33 percent reading in December 2010. The net percent of owners expecting higher real sales lost 1 point, falling to a net negative 4 percent of all owners (seasonally adjusted), producing a four month decline of 16 percentage points. What looked like the beginning of a recovery in sales and expectations fizzled, just as they did in 2011. Plans to add to inventories lost a point, falling to a net negative 1 percent of all firms (seasonally adjusted), more plan to reduce than plan to add new stocks. The pace of inventory reduction picked up a bit, with a net negative 10 percent of all owners reporting growth in inventories (seasonally adjusted), a 3 point deterioration.
INFLATION
Eighteen (18) percent plan on raising average prices in the next few months (up 1 point), 3 percent plan reductions (unchanged). Seasonally adjusted, a net 17 percent plan price hikes, up 1 point from June. Twenty- one (21) percent of the NFIB owners reported raising their average selling prices in the past 3 months (unchanged), and 14 percent reported price reductions (down 5 points). Seasonally adjusted, the net percent raising selling prices was 8 percent, 5 points higher than June. Inflation seems to be moderate on Main Street, so the Federal Reserve is probably right that at least near-term, inflation is not a concern.
PROFITS AND WAGES
Reports of positive earnings trends gave up 5 points, falling to a negative 27 percent in July; this after falling 7 points in June. Three percent reported reduced worker compensation and 16 percent reported raising compensation, yielding a seasonally adjusted net 12 percent reporting higher worker compensation (down 1 point). A net seasonally adjusted 8 percent plan to raise compensation in the coming months, up 1 point from June.
CREDIT MARKETS
Ninety-three (93) percent of all owners reported that all their credit needs were met or that they were not interested in borrowing. Thirty (30) percent reported all credit needs met, seven percent reported that not all of their credit needs were satisfied, and 51 percent said they did not want a loan. Only 3 percent reported that financing was their top business problem. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 2 points from June. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 7 percent, the most benign reading since July 2007.
COMMENTARY
If it weren’t for population growth, Gross Domestic Product growth would be about zero. More people eat burgers, get haircuts, drive a vehicle, etc. So, 1 percent population growth will support something like a 1 percent growth in spending. And that’s our basic support level. Absent that (as in Japan and Eastern Europe where it’s near zero), growth would be under 1 percent. And the NFIB indicators point to a continuation of just that kind of growth.
Just for perspective, compare some of this July’s numbers to 2000, arguably the best economy in history, with 64.5 percent of the adult population employed. A record 70 percent reported capital spending in the prior 6 months in the January, 2000 survey compared to 54 percent today. The percent of owners with a job opening peaked at 34 percent in 2000 compared to 15 percent today. A record 19 percent planned to create new jobs late in 1999 compared to 5 percent today. Twenty-eight (28) percent of the owners thought it was a good time to expand (December 1999) compared to 5 percent today. And this is after three years of (alleged) expansion.
But still, with all the data showing painfully slow economic growth, the Administration continues to promote increases in taxes and regulatory costs. Some “experts” argue that the marginal rates don’t matter to hiring and real investment spending and that there is no uncertainty, at least that impacts economic activity. We teach differently in our business schools and economics courses, uncertainty is a core concept in our business theories and models and there is considerable empirical support for the adverse impact of uncertainty on decision making. It would help immensely if they took a course or two.
Overall, it is clear that the “economic growth stars” are not in alignment and that we can expect very sluggish growth for the balance of the year, ever grateful for population growth which will help insure that we don’t experience the dreaded recession. If consumers and business owners were presented with a plan to resolve our calamitous debt/spending cycle that they could believe in, they would spend more. Until then, no risky bets will be placed.
This survey was conducted in July 2012. A sample of 10,799 small-business owners/members was drawn. One thousand eight hundred and three (1,803) usable responses were received – a response rate of 17 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.
