Small Business Economic Trends - December 2012
Summary
OPTIMISM INDEX
The Index of Small Business Optimism declined 5.6 points, one of the largest declines in survey history. The Index has been lower only 7 times since the monthly surveys were began in 1986. Prior to 1986, just two readings were lower, in 1975Q1 and 1980Q2. There were two major events shaping the November results, the election and hurricane “Sandy.” What is quite clear from the data is that the election was the primary cause of the decline in owner optimism, not the hurricane, although hurricane effects were apparent.
LABOR MARKETS
The plunge in owner optimism did not drag the labor market indicators down proportionately, but they were at recession levels to begin with. Job creation weakened a bit from the October reading, with the average change in employment per firm falling to -0.04 from 0.02 workers. Ten (10) percent of the owners (down 1 point) reported adding an average of 2.4 workers per firm over the past few months, and 11 percent reduced employment (up 1 point) an average of 3.1 workers (seasonally adjusted). The remaining 79 percent of owners made no net change in employment. Forty-six (46) percent of the owners hired or tried to hire in the last three months and 36 percent reported few or no qualified applicants for open positions. Overall, little change from October numbers, though leaning in a negative direction. The percent of owners reporting hard to fill job openings rose 1 point to 17 percent of all owners. Job creation plans remained weak, with a net 5 percent planning to increase employment, up a point from October but historically a weak number for a recovery period.
CAPITAL SPENDING
The frequency of reported capital outlays over the past 6 months fell 1 point to 53 percent, still in “maintenance mode.” The percent of owners planning capital outlays in the next 3 to 6 months fell 3 points to 19 percent. Six percent characterized the current period as a good time to expand facilities (down 1) compared to 14 percent in September 2007. The net percent of owners expecting better business conditions in 6 months was a net negative 35 percent, a 37 point decline A net negative 5 percent of all owners expect improved real sales volumes, down 8 points. Twenty- three (23) percent reported “poor sales” as their top business problem, up 1 point. Overall, this is a poisonous climate for investment and expansion.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was unchanged at a negative 15 percent. Twenty-three percent still cite weak sales as their top business problem, historically high, but down from the record 34 percent reading last reached in March 2010. Consumer spending remains weak, especially on services although auto sales have recently shown some strength. The net percent of owners expecting higher real sales fell 8 points to a negative 5 percent of all owners (seasonally adjusted), 17 points below the 2012 high of net 12 percent reached in February. The pace of inventory reduction continued, with a net negative 10 percent of all owners reporting growth in inventories (seasonally adjusted), two points worse than October. For all firms, a net negative 2 percent (down 2 points) reported stocks too low, a bit less satisfaction with stocks than in October, most likely due to a deterioration in sales forecasts. Plans to add to inventories remained weak at a net negative 5 percent of all firms (seasonally adjusted), 4 points worse than October. This is consistent with the reported build-up of inventories at the macro level. With expected business conditions and expected real sales in the tank, it is not surprising that inventory demand remains weak.
INFLATION
Fifteen (15) percent of the NFIB owners reported raising their average selling prices in the past 3 months (down 3 points), and 17 percent reported price reductions (up 1 point)). Seasonally adjusted, the net percent of owners raising selling prices was 0 percent, down 5 points. With sluggish consumer spending, there is little opportunity to raise prices and make it stick. Twenty-one (21) percent plan on raising average prices in the next few months (up 2 points), 4 percent plan reductions (unchanged). Seasonally adjusted, a net 16 percent plan price hikes, unchanged. It appears that the Fed’s forecast (hope) for continued low inflation is a reality on Main Street.
EARNINGS AND WAGES
Reports of positive earnings trends lost ground in November, falling to a net negative 32 percent. Six percent reported reduced worker compensation and 12 percent reported raising compensation, yielding a seasonally adjusted net 7 percent reporting higher worker compensation (down 4 points). A net seasonally adjusted 4 percent plan to raise compensation in the coming months, down 5 points from October. Earnings are the major source of capital for small firms to finance growth and expansion (and repay debts incurred to invest in their firms). The past and promised increases in regulatory costs and in taxes will diminish the available financial support for growth as well as reduce the expected profitability associated with new investments in the business or new hires.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, down 2 points. Twenty-eight (28) percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem, compared to 23 percent citing taxes, 23 percent citing weak sales and 18 percent citing unreasonable regulations and red tape. Thirty (30) percent of all owners reported borrowing on a regular basis, unchanged from October. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10 percent (more owners expect that it will be “harder” to arrange financing than easier), 2 points worse than in October. Whatever QE3 is doing, it isn’t changing the expectations of business owners about credit availability or costs in the coming months.
COMMENTARY
Apparently the level of uncertainty was not resolved in a way that was supportive of many small-business owners. Out of 377 surveys since the first in 1973, the current reading of the Index of Small Business Optimism is the tenth lowest on record. The decline in the Index from already recession level readings in October was one of the largest on record. Something bad happened, and it wasn’t Sandy based on the NFIB survey data for November, it was the election. Owners in the rest of the country were as bummed out as those in Sandy states.
Some things are more certain, the healthcare law will not be repealed as advertised. The “war” on success is now public policy as the President insists on higher tax rates for the “rich,” those making $250,000 or more. He continues to obfuscate by claiming that only 3 percent of small- business owners will be impacted, as if even those are not a concern. But the disingenuousness of that statistic masks the fact that the denominator in his fraction is “30 million small businesses.” But, there are, according to Census, only 6 million employer firms, so an accurate assessment of the percentage of employer firms impacted is more like 15 percent. The President claims that there is not enough revenue in restricting deductions; that eliminating charitable deductions would, for example, put hospitals, universities etc. on the verge of collapse. This assumes that people only give for a tax deduction; this would be news to the Red Kettle Salvation Army collectors! They don’t hand out receipts, and even donors in the highest tax bracket still have to pony up over 60 percent of any gift out of their own pockets. Charity is not about tax breaks, it about doing good things. Meanwhile, new and proposed changes in regulations proliferate at record rates.
The growth in the third quarter was revised up from 2 percent to 2.7 percent. The bad news was that most of the upward revision was in inventory accumulation, government spending and an improved trade deficit, unlikely to be as supportive in the fourth quarter. Consumer spending was revised down substantially as the NFIB sales reports indicated, and there are no signs of improvement. Spending on services was revised down to 0.3 percent and this is 70 percent of consumer spending and a sector that is dominated by small business (education and health care aside). Consumer sentiment (University of Michigan/Reuters) crashed, whatever the cause, it does not bode well for consumer spending. For the millions of unemployed held captive by Washington politics, it will not be much of a “Merry Christmas.”
This survey was conducted in November 2012. A sample of 3,938 small-business owners/members was drawn. Seven hundred thirty-three (733) usable responses were received – a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.
