Small Business Economic Trends - August 2013
SUMMARY
OPTIMISM INDEX
The NFIB Index of Small Business Optimism gained a whoppin’ 0.6 points in July. At 94.1, the Index does not impress and signals nothing but a subpar performance for the 3rd quarter. In an attempt to “make lemonade”, the July reading is the 4th highest reading since December 2007 which was 94.6, well below the average reading of 100 in the prior 35 years and only half a point better than the July reading.
LABOR MARKETS
July was another slow month for jobs among NFIB’s 350,000 owners. Nine percent of the owners (down 2 points) reported adding an average of 2.9 workers per firm over the past few months. Offsetting that, 12 percent reduced employment (unchanged) an average of 2.6 workers (seasonally adjusted), producing the seasonally adjusted gain of negative 0.11 workers per firm. Fifty (50) percent of the owners hired or tried to hire in the last three months and 40 percent reported few or no qualified applicants for open positions. Basically, owners have stopped reducing employment (historically low percent reporting reductions), so initial claims have been falling, but they have not resumed hiring which would reduce the unemployment rate for good reasons, not because people are leaving the labor force. Twenty (20) percent of all owners reported job openings they could not fill in the current period (up 1 point), a good omen for the unemployment rate. Fifteen (15) percent reported using temporary workers, up 3 points from June. Job creation plans rose 2 points to a net 9 percent planning to increase total employment, better, the best reading since August 2012. But overall, not a lot of promise for new job growth.
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 improved one point, rising to a negative 7 percent. Sixteen (16) percent still cite weak sales as their top business problem, historically high, but far better than the record 34 percent reading last reached in March 2010. The net percent of owners expecting higher real sales volumes rose 2 points to 7 percent of all owners (seasonally adjusted), 7 points below the cycle high of a net 14 percent reached in February 2011, and that was a poor reading. These expectations are not the kind that will generate a lot of new employment or new orders for inventories.
The pace of inventory reduction continued, with a net negative 10 percent of all owners reporting growth in inventories (seasonally adjusted), 3 points worse than June. For all firms, a net negative 1 percent (a 1 point improvement) reported stocks too low. The net percent of owners planning to add to inventory stocks was unchanged at a negative 1 percent, in line with rather poor expectations for sales growth.
CAPITAL SPENDING
The frequency of reported capital outlays over the past 6 months fell 2 points to 54 percent, 7 points below the average spending rate through 2007. Of those making expenditures, 37 percent reported spending on new equipment (down 2 points), 21 percent acquired vehicles (down 2 points), and 13 percent improved or expanded facilities (down 1 point). Five percent acquired new buildings or land for expansion (down 1 point) and 10 percent spent money for new fixtures and furniture (unchanged). Reports of outlays fell in all categories except fixtures and furnishings. Overall, this is a weaker spending picture. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 23 percent. Nine percent characterized the current period as a good time to expand facilities (up 2 points). The net percent of owners expecting better business conditions in 6 months was a net negative 6 percent, 2 points worse than June. This rather negative outlook for economic growth is not conducive to capital spending that depends on future revenue growth to support it.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was 4 percent, down 4 points. Sixteen (16) percent plan on raising average prices in the next few months (down 3 points), and 3 percent plan reductions (unchanged). Seasonally adjusted, a net 15 percent plan price hikes, down 3 points. Overall, there is not much pressure on selling prices, with reported and planned price increases mostly offset by actual and planned reductions in selling prices, a fairly benign inflation picture.
PROFITS AND WAGES
Reports of positive earnings trends improved a point in July to a negative 22 percent. Four percent reported reduced worker compensation and 19 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation (unchanged). A net seasonally adjusted 11 percent plan to raise compensation in the coming months, up 5 points.
CREDIT MARKETS
Five percent of the owners reported that all their credit needs were not met, unchanged and the lowest reading since February, 2008. Thirty (30) percent reported all credit needs met. Only 3 percent reported that financing was their top business problem compared to 21 percent citing taxes. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8 percent (more owners expect that it will be “harder” to arrange financing than easier), 1 point worse than in June but the third most favorable reading since 2007. Thirty- one (31) percent of all owners reported borrowing on a regular basis, up 2 points. A net 6 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged from June. The average rate paid on short maturity loans was 5.6 percent.
COMMENTARY
Gross Domestic Product (GDP) revisions confirmed what the NFIB survey has been reporting – we are not producing much additional output and not employing many new workers. Growth in the 4th quarter of 2012 was essentially (0.1%), growth in the 1st quarter of 2013 was revised down to 1.1 percent and the 2nd quarter at 1.7 percent (first guess). Only 160,000 new jobs (July) would be insufficient to lower the unemployment rate to 7.4 percent were it not for more people disappearing from the labor force. If you do not want a job, you can not be counted as “unemployed”. Broader measures of unemployment reveal a weak labor market. Much has been made over the high level of job creation in recent months. GDP numbers seem inconsistent, what are they making? July’s job growth is more consistent with the poor GDP numbers.
Meantime, the leadership vacuum continues with Congress unable to negotiate and the President on the campaign trail rarely talking about the big issues while tossing government tidbits to various voter blocks. Employment remains millions below its level in 2008 and only 11 percent of consumers think government policy is “good” (Reuters/University of Michigan, July survey). This is where we stand after four years of “recovery”.
The amazing stock market continues to surge ahead, even as prospects for earnings growth fade. On Main Street, there is no evidence of profit growth. The economy remains bifurcated, exports turned in a good performance, mostly activity for the large manufacturers, energy companies and agribusiness. Sales for small businesses, especially at service firms, continue to languish. Job openings improved, signaling a tightening in labor markets due as much to departures from the labor force as to the creation of new jobs (of which there were few). But this puts downward pressure on the unemployment rate. Plans to create new jobs also advanced, in spite of pessimistic views of future sales growth, but still historically low and not typical of periods of economic growth.
This survey was conducted in July 2013. A sample of 10,799 small-business owners/members was drawn. One thousand eight hundred and seventy-three (1,615) usable responses were received – a response rate of 15 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2013, the NFIB retains ownership. All Rights Reserved.
