Small Business Economic Trends - July 2011
Summary
OPTIMISM INDEX
NFIB’s monthly Small-Business Optimism Index dropped one tenth of a point (0.1) in June, settling at 90.8, basically unchanged from the previous month. While some indicators rose slightly, including expected capital outlays, pessimism about future business conditions and expected real sales gains pulled the Index down, causing a small but disappointing drop for the fourth consecutive month. Although June marked the second year anniversary of the recovery, it appeared there was little happening to make small business owners more optimistic.
LABOR MARKETS
Although June’s employment growth was weak, 15 percent (seasonally adjusted) of small firms reported unfilled job openings, a 3 point increase and an indication that the unemployment rate will ease back below 9 percent in the coming months. Over the next three months, 11 percent plan to increase employment (down 2 points), and 7 percent plan to reduce their workforce (down 1 point), yielding a seasonally adjusted 3 percent of owners planning to create new jobs, and a 4 point improvement. However, these statistics are still at recession levels and any real employment gains are still to be realized.
CAPITAL SPENDING
Over the past six months, 50 percent of all firms reported making capital expenditures, an historically low average. Of those making expenditures in June, 32 percent reported spending on new equipment (down 4 points), 19 percent acquired vehicles (up 3 points), and 11 percent improved or expanded facilities (up 2 points). Five percent acquired new buildings or land for expansion (up 1 point) and 10 percent spent money for new fixtures and furniture (down 2 points). There was a slight increase in firms
planning capital outlays in the next three to six months; this indicator rose 1 point to 21 percent, although still a recession level reading. Money is available, but most owners are not interested in a loan to finance the purchase of equipment they don’t need.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher
nominal sales over the past three months improved 2 percentage points, rising to a net negative 7 percent, more firms with sales trending down than up, but still the second best reading in 41 months. The net percent of owners expecting higher real sales fell 3 points to a net 0 percent of all owners (seasonally adjusted), 13 points below January’s reading. This is bad news for hiring and inventory investment. Small business owners continued to liquidate inventories and at a faster pace than April which was one of the lowest rates of reduction in nearly three years. A net negative
14 percent of all owners reported growth in inventories (seasonally
adjusted), a 1 point deterioration.
INFLATION
Twenty-five (25) percent of the NFIB owners reported raising their average selling prices in the past three months, compared to 16 percent who reported price reductions, still high, but fading. Seasonally adjusted, the net percent raising selling prices was 10 percent, down 5 points from May, but the third double digit month in a row and 23 points higher than a year ago. Prices are rising again on Main Street and this will feed the Consumer Prince Index measures of inflation (headline and core, there are only a few gas stations and groceries in the membership). Seasonally adjusted, a net 15 percent plan price hikes, 8 points lower than in May.
PROFITS AND WAGES
Reports of positive earnings trends were unchanged from last month, a net negative 24 percent of all owners, not a pretty picture, but the best reading in 42 months. The recent rise in the percent of owners successfully raising prices is contributing to some improvement in the bottom line, but sales growth is not helping. Corporate profits are at a record high level as a share of GDP, but the story is very different on Main Street. For those reporting lower earnings compared to the previous three months, 54 percent cited
weaker sales (up 4 points), 2 percent blamed rising labor costs, 15 percent higher materials costs, 2 percent higher insurance costs, and 5 percent blamed lower selling prices. Five percent blamed higher taxes and regulatory costs.
Six percent reported reduced worker compensation and 15 percent reported
gains yielding a seasonally adjusted net 8 percent reporting higher worker
compensation, one point lower than May which was the second strongest
reading since the fourth quarter of 2008. A seasonally adjusted a net 7
percent plan to raise compensation in the coming months, unchanged from
May figures.
COMMENTARY
It is hard to think of anything that happened in June that would make small business owners more optimistic. The Federal Reserve Bank stayed course, making the big bankers and traders happy; the large manufacturers are doing well exporting and paying no taxes (well, GE anyway); all that liquidity is chasing stocks (new technology stocks are hot); and all is well on Wall Street and K Street. Virtually all of the employer firms in the U.S. are not publically traded. If they were, the stock market picture would be grim, with only 18 percent reporting earnings improvements quarter on quarter compared to 41 percent reporting declines. The Administration invokes the “helping small business” (recently found to be the second most respected profession in a Gallup poll) mantra, but they don’t have a clue. Small business is invisible to them beyond the press conferences. Indeed, Treasury Secretary of the Treasury Geitner told small business owners in his Congressional testimony that the Administration needs more of their money to support government spending, remember the “1099 health care
requirement” that was supposed to catch all sorts of tax cheats? Arguing that only 3 percent of the owners would be impacted, he suggested that if owners don’t pay up, education will get less money - not that Washington spends money on anything effectively, including education; they always cut something that hurts, not the political pork and patronage that cost billions. The “3 percent” figure is highly misleading, since the denominator in that calculation is based on 30 million Schedule C claims. But there are only six million employer firms in the U.S. that employ people other than the owner(s) so if the numerator is correct, the figure for those impacted firms that employ someone would be five times larger than the Treasury Secretary intimates. That’s the Administration’s “job creation” policy. Also, the Administration seems to enjoy the leadership vacuum it has created. Nobody is in charge except the regulators who relentlessly pursue the “big government” agenda by issuing truckloads of edicts. The President brushes off criticism of the NLRB/Boeing controversy by saying he doesn’t involve himself with the NLRB (other than making recess appointments of SEIU cronies!). Does he think people really believe this? Did anyone notice that the TSA is now unionized, even though the original legislation prohibited this? About 8,000 of 40,000 employees voted for the union, that was all it took to put all employees under the union management which is now meeting with TSA. Stay tuned.
The Administration and its Wall Street affiliates don’t seem to understand the nature of the problems on Main Street, which is no surprise because few of them have ever had a real private sector job. But this produces bad policy, at best benign but often detrimental to the recovery they claim they want and that is underway. June was the two year anniversary of the recovery, in case you didn’t notice.
This survey was conducted in June 2011. A sample of 3,938 small-business owners/members was drawn. Seven hundred thrity-three (766) usable responses were received - a response rate of 20 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2011, the NFIB retains ownership. All Rights Reserved.
