Small Business Economic Trends - June 2011
Summary
OPTIMISM INDEX
The Index of Small Business Optimism fell 0.3 points in May to 90.9. This month marks the third monthly decline in a row. The proximate cause is the fact that 1 in 4 owners still report weak sales as their top business problem. Consumer spending is weak, especially for “services,” a sector dominated by small businesses. the index makes clear that optimism is moving in the wrong direction: a recession-level reading for an economy fighting its way through a recovery. Also, inflation is a growing concern now with 1 in 10 citing this as their most serious business problem meaning cost side pressures coming in the “back door,” not rising food prices at home.
LABOR MARKETS
There was no significant job creation on “Main Street”, at least among NFIB’s 350,000 member firms. Twelve percent (seasonally adjusted) reported unfilled job openings, down 2 points and a clear signal that unemployment rates are headed up. Over the next three months, 13 percent plan to increase employment (down 3 points from April) and 8 percent plan to reduce their workforce (up 2 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs, a very poor reading.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months was steady at 50 percent of all firms, an historically weak reading. The percent of owners planning capital outlays in the next three to six months fell 1 point to 20 percent, a recession level reading. Money is cheap, but most owners are not interested in a loan to finance equipment they don’t need. Prospects are still uncertain enough to discourage any but the most profitable and promising investments. Five percent characterized the current period as a good time to expand facilities (seasonally adjusted), up 1 point but 3 points lower than January. The net percent of owners expecting better business conditions in six months was a negative 5 percent, 15 percentage points lower than January.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 4 percentage points, falling to a net negative 9 percent, more firms with sales trending down than up, but still the second best reading in 38 months. The net percent of owners expecting higher real sales fell 2 points to a net 3 percent of all owners (seasonally adjusted), 10 points below January’s reading. On the inventory front, more small business owners liquidated inventories this month than in April. A net negative 13 percent of all owners reported growth in inventories (seasonally adjusted), a 4 point deterioration. Any increase in inventories at the macro level will be sitting mostly at the large firms, many of whom are producers. There is not much demand for it on Main Street.
INFLATION
Inflation is showing its face on Main Street. For 25 months, more owners reported cutting average selling prices than raising them. In February, this changed, with a net 5 percent reporting raising average selling prices. This has increased to 15 percent in May, a gain of 39 percentage points from the low reading in 2009 and 26 points higher than last September. The massive inventory reduction was primarily responsible for the dramatic decline in prices, but that is pretty much over as owners report “balance” in their inventory stocks. About as many owners now report stocks “too low” as report inventories “too high. Plans to raise prices fell 1 point to a net seasonally adjusted 23 percent of owners, the second highest reading in 31 months. In March 2009, the reading was a net 0 percent. The NFIB model now anticipates a stronger push on the core inflation measures, especially since rents are rising which reduces the ability of the imputation for owner inflation to offset the price increases being posted on Main Street.
PROFITS AND WAGES
In spite of rather bad economic news, reports of positive earnings trends improved 2 points in May, registering a net negative 24 percent. Certainly the increase in the frequency of price hikes is contributing to some improvement in the bottom line, but sales growth is not helping. Large firms may be posting great profits, but the trend on Main Street is still not supportive of solid hiring and capital spending. Costs for energy, materials and labor, and higher interest rates are not yet a serious problem, these are yet to come. For those reporting lower earnings compared to the previous three months, 50 percent cited weaker sales, 2 percent blamed rising labor costs, 13 percent higher materials costs, 2 percent higher insurance costs, and 7 percent blamed lower selling prices. Seven percent blamed higher taxes and regulatory costs. As for employee compensation, 6 percent reported reduced worker compensation and 16 percent reported gains yielding a seasonally adjusted net 9 percent reporting higher worker compensation, unchanged from April and the second strongest reading since the fourth quarter of 2008. A seasonally adjusted net 7 percent plan to raise compensation, also unchanged from April.
COMMENTARY
The May survey indicated that there was very little job creation on Main Street in May and that the unemployment rate would rise and, unfortunately, this turned out to be the case. McDonald’s one time hiring binge is much appreciated, but is not a repeatable event. Taking the retail anomaly out, private job creation was clearly weaker in April and this was confirmed in May. The Administration has offered tax breaks for hiring and equipment investment with few results. Failing to understand the reasons small business owners are not hiring or investing has resulted in a set of policies that have not been very effective. Low interest rates are not an inducement to buy capital equipment that is not needed. Remember, there was much hiring and expansion based on spending by consumers who did not save. Now there is “excess capacity” and it has not yet been rationalized.
It is simple: when sales pick up, owners will have a reason to hire more workers to take care of customers, to produce more output and will have a reason to invest in new equipment and expansion. The proximate cause of the collapse of spending in 2008 was reduced consumer spending. Dealing with this was not a priority in the “stimulus.” So, one in four owners still reports “weak sales” as their top business problem and surveys of consumers show they are uncertain about the future as are business owners. This is amplified by the heavy debt burdens consumers carry as they try to “restructure” and pay down debt. So the Administration is applying misdirected policies to the problem and does not want to acknowledge that some problems can not be resolved quickly. This requires patience, which few who depend on elections for their jobs possess.
The “feedstock” for inflation continued to grow, with the number of owners actually raising average selling prices reaching a net 15 percent, seasonally adjusted. Thirty-one (31) percent reported raising average selling prices, double the percent cutting prices which suggests that average price levels will be rising, and that is “inflation.” The Federal Reserve protests the notion that QE2 liquidity is driving commodity prices as liquidity scours the world to find a higher return than that offered by banks, but there is a strong correlation between Federal Reserve purchases and commodity prices. Certainly the risk of “too low for too long” is starting to worry some observers. And savers are getting real tired of the low return on their savings.
To many, the world looks like it is falling apart at the seams, with evil “leverage” creating problems everywhere. Everyone can’t live beyond their means, our governments are finally starting to figure that out.
This survey was conducted in May 2011. A sample of 3,938 small-business owners/members was drawn. Seven hundred thrity-three (733) usable responses were received - a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2011, the NFIB retains ownership. All Rights Reserved.
