Small Business Economic Trends - June 2013
SUMMARY
OPTIMISM INDEX
The NFIB Index of Small Business Optimism rose 2.3 points to 94.4. This is the second highest reading since the recession started but not one signaling strong economic growth. Pessimism about the economy and future sales did moderate, 8 of the 10 Index components gained, but planned job creation fell a point and reported job creation stalled after 5 “up” months.
LABOR MARKETS
Forty-seven (47) percent of the owners hired or tried to hire in the last three months and 38 percent reported few or no qualified applicants for open positions. So, employment reductions continued to fade (thus good “initial claims” numbers), but hiring failed to hold up its end of the job creation picture. Nineteen (19) percent of all owners reported job openings they could not fill in the current period (up 1 point). Thirteen (13) percent reported using temporary workers, little changed over the past 10 years. The health care law provides incentives to increase the use of temporary and part-time workers, but this indicator has not registered a trend toward the use of more temps. Job creation plans fell 1 point to a net 5 percent planning to increase total employment, a weak reading.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose 1 point to 57 percent, 8 points below the average spending rate through 2007. The frequency of expenditures remained at the high end of recession-level readings, consistent with the lack of interest in expansion and the grim (but improving) outlook for business conditions. Overall, the frequency of expenditures improved, but not to levels typical of a normal expansion. The percent of owners planning capital outlays in the next three to six months was unchanged at 23 percent. Eight percent characterized the current period as a good time to expand facilities (up 4 points), still a very weak number compared to an average value of 16 percent pre-recession. The net percent of owners expecting better business conditions in six months was a net negative 5 percent, 10 points better than April and 23 points better than March, but still negative. A pick up in capital spending on Main Street does not seem to be in the cards.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was unchanged at a negative 4 percent, the best reading in nearly a year but still more firms reporting declines than gains. The low for this cycle was a net negative 34 percent (July 2009) reporting quarter over quarter gains. 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 4 points to 8 percent of all owners (seasonally adjusted), still 6 points below the cycle high of a net 14 percent reached in February 2011, and that was a poor reading. Sales expectations are trending better, but are still historically weak.
The pace of inventory reduction continued, with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), down 1 point from April. For all firms, a net 1 percent (up 2 points) reported stocks too low, an unusually “lean” level of satisfaction with inventory stocks. Plans to add to inventories gained 3 points, rising to a net 3 percent of all firms (seasonally adjusted). Overall, a rather benign inventory picture, some reductions, but widespread satisfaction with current stocks after the huge inventory adjustments in the recession and weak plans to add to stocks in light of weak sales growth and rather pessimistic views about the future of the economy.
INFLATION
Sixteen (16) percent of the NFIB owners reported reducing their average selling prices in the past three months (up 1 point), and 19 percent reported price increases (down 1 point). Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, down 1 point. Seasonally adjusted, a net 15 percent plan price hikes, down 3 points. Overall, price pressures from Main Street remain “well contained”. Although nearly one in five raised prices, nearly as many reduced average prices even though only a few percent of the owners planned to reduce prices. With weak spending and job growth, few are able to make price hikes stick on balance and many more who did not plan to cut prices will find it a competitive necessity.
EARNINGS AND WAGES
Reports of positive earnings trends improved 1 point in May to a net negative 22 percent, still a poor reading. Three percent reported reduced worker compensation and 20 percent reported raising compensation, yielding a seasonally adjusted net 16 percent reporting higher worker compensation (up 1 point). Overall, this is good news for employees, as compensation gains have been trending up, holding at double digit levels since 2011. A net seasonally adjusted 9 percent plan to raise compensation in the coming months, unchanged.
CREDIT MARKETS
Five percent of the owners reported that all their credit needs were not met, down 1 point and the lowest reading since February 2008. Twenty-eight (28) percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, down 2 points. A net 5 percent reported loans “harder to get” compared to their last attempt, down 2 points. The average rate paid on short maturity loans was 5.7 percent, pretty much unchanged for years now.
COMMENTARY
The U.S. economy continued to plod along in the first quarter, now at a revised 2.4 percent. Not much of an improvement over the 1.4 percent fourth quarter reading and still well below trend. The ISM has decline for three straight months and is below 50, the dividing line between expansion and contraction. Government spending has been in contraction for some time now, cutting the growth rate by a half a point or more while the private sector grows – but this is good. The deficit is now projected to fall to $650 billion, crushed by revenues from accelerated 2012 income generation induced by higher 2013 tax rates and by restoration of the FICA tax as well as sequestration. Of course the IRS may still be giving line dancing lessons. The Fed is on course to purchase $540 billion of Treasury bonds (almost all of the projected deficit) and $480 billion of mortgage securities. An increasing number of observers wonder whether this is having any impact of consequence on employment (the alleged target) or even housing. It is contributing to uncertainty about the longer term impact of QE on the economy, bond bubbles, and the impact of the rapid acceleration of house prices (from very low levels historically of course).
The small business half of GDP is clearly not participating much beyond growth generated by population gains. More businesses are being formed than lost, so there is some boost to job creation there, but too many existing firms have not yet started to replace the workers shed during the recession. The Optimism Index is back to the May 2012 level which are identical to the November 2007 level (the Index fell all through 2007, signaling the oncoming recession). Since then, the Index has been higher in only three months, and by less than 2 points. The low for that period was 81.0 reached in March, 2009. So the Index is 13 points higher now, good news, but 6 points below the pre-2008 average and 13 points below the peak for the expansion, bad news. Until this sector gets in gear, it will be hard to generate meaningful economic growth. GDP growth was 8 percent in 1983, the first year of that recovery period.
There are many headwinds for growth, the most important being consumer spending. Nothing encourages hiring and inventory and capital investment more than an growth in customers and spending. Consumer sentiment is up some, but not really supported by income growth or new jobs. The savings rate is under 3 percent, so spending is financed by reduced saving (which pays nothing anyway – people who bought 30 year Treasury bonds in 1983 are just now losing those great coupons). The flow of new regulations is very strong (the President promised to use regulatory power to accomplish his goals even if Congress did not cooperate), each agency with its own set of “victims”. On top of that, the ACA is about to grip the entire business community in a morass of new taxes, forms to fill out, fines and higher labor costs. Our global customers are experiencing slow growth for the most part and buying less. Monetary policy has become incomprehensible and Fiscal policy is in disarray. Uncertainty is a major impediment to economic progress. With 2014 elections almost upon us, we’ll just have to wait and see.
This survey was conducted in May 2013. A sample of 3,938 small-business owners/members was drawn. Seven hundred fifteen (715) usable responses were received – a response rate of 18 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2013, the NFIB retains ownership. All Rights Reserved.
