Small Business Economic Trends - March 2013
SUMMARY
OPTIMISM INDEX
The NFIB Index of Small Business Optimism increased 1.9 points in February, to 90.8. While a nice improvement over the last several reports, the Index remains on par with the 2008 average and below the trough of the 1991-92 and 2001-02 recessions. The direction of February’s change is positive, but not indicative of a surge in confidence among small-business owners. Of the ten Index components, one fell, one remained unchanged and eight improved. Most notably, the gains in capital spending and inventory investment plans were large, but by historical standards the levels remain very low.
LABOR MARKETS
Forty-four percent of the owners hired or tried to hire in the last three months and 34 percent reported few or no qualified applicants for open positions. Twenty-one (21) percent of all owners reported job openings they could not fill in the current period, up 3 points from January and 5 points from December. Job creation plans rose 1 point to a net 4 percent planning to increase total employment, historically weak but 3 points better than December, so a small positive trend.. Not dramatic improvements but solid and headed in a positive direction. Overall, labor market indicators improved, extending December’s gains, suggesting that there will be modestly better job creation and unemployment numbers. However, employment is still below its level in 2008 so there is a long way to go to restore employment to its pre-recession level. A continued rebound in the labor intensive housing industry will help a lot.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose 1 point to 56 percent on top of a 3 point gain in January, still in “maintenance mode” but gaining. Overall, the frequency of expenditures improved, but not to levels typical of normal growth. The percent of owners planning capital outlays in the next 3 to 6 months rose 4 points to 25 percent. Five percent characterized the current period as a good time to expand facilities (down 1 point), historically a very weak number. The net percent of owners expecting better business conditions in six months was a net negative 28 percent, 7 points better than December and 2 points better than January but still disastrous, among the lowest reading in nearly 40 years.
INVENTORIES AND SALES
Weak sales is still the top business problem for 18 percent of owners. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged in February, at a negative 9 percent. There are still far more owners reporting declining sales than reporting positive sales trends. Consumer spending remains weak, especially on services although durable goods sales have recently shown some strength. The net percent of owners expecting higher real sales volumes rose 2 points to 1 percent of all owners (seasonally adjusted), 11 points below the 2012 cycle high of a net 12 percent reached in February, 2012. While sales trends improved, they are still weak when viewed through historical context.
The pace of inventory reduction continued, with a net negative 9 percent of all owners reporting growth in inventories (seasonally adjusted), 2 points worse than January. For all firms, a net 1 percent (up 2 points) reported stocks too low, historically a good level of satisfaction with inventory stocks. But, with rather dismal sales expectations, plans to add to inventories remained weak at a net negative 1 percent of all firms (seasonally adjusted), an improvement of 6 points from January.
INFLATION
Sixteen (16) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 1 point), and 21 percent reported price increases (up 2 points). Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, unchanged. With spending growth weak and excess capacity still widespread, there are few opportunities to raise prices. Seasonally adjusted, a net 23 percent plan price hikes, up 2 points. The recession and the weak recovery have made sure that the lid stays on inflation, a source of comfort for the Fed.
EARNINGS AND WAGES
Earnings trends were unchanged from January’s reading of a net negative 26 percent. In comparison, the Fortune 500 are posting record high profits, revealing a bifurcated economy. Three percent of small employers reported reduced worker compensation and 19 percent reported raising compensation, yielding a seasonally adjusted net 14 percent of businesses reporting higher worker compensation (up 1 point). Seasonally adjusted, a net 8 percent plan to raise compensation in the coming months, up 1 point.
CREDIT MARKETS
Small business demand for credit remained weak in February, given the weak economy. Only 7 percent of owners surveyed reported that all their credit needs were not met, up 1 point but only 3 points above the record low. Twenty-nine percent reported all credit needs met, and 51 percent explicitly said they did not want a loan. Only two percent of owners reported that financing was their top business problem. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, down 2 points and 1 point shy of the record low of 28 points set in November 2010. A net 7 percent of owners reported that loans are “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged from January, though it is now one in four of those in the market. 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 better than in January.
COMMENTARY
The President has crisscrossed the country telling us how many people will be hurt if he has to deprive them of his largess if spending is cut. And he has chosen cuts that will maximize the pain felt by the citizens, refusing the opportunity to actually lead and manage the cuts more sensibly. But he has nothing to say about the pain he inflicts on the producers of jobs that could help those who are unemployed and want to work. That pain is obvious on Main Street, most recently in the reports of the Regional Federal Reserve Banks. His programs are damaging the economy and creating more dependents on his largess while financed by those who make the economy run. He is clearly not in the mood to compromise much even though consumers are not happy with policy. It is not likely that higher taxes and higher energy costs will make them happy. Only 15 percent of consumers in the University of Michigan/Reuters February poll thought government is doing a “good” job, 43 percent a “poor” job. Seventy-six percent of NFIB owners think that business conditions will be the same (ugh!) or worse in six months - not a pretty picture.
The economy is clearly bifurcated, with S&P profits at record levels while GDP posts a growth rate of 0.1 percent (excluding government, growth would have been over 1 percent, still a lousy reading). The small business half of the economy is clearly languishing based on NFIB surveys of its 350,000 member firms. So, the average growth of these two sectors is the growth of the private economy (government excluded) and that’s not good. With some evidence that the large firms will not perform as well this year as last, prospects for strong growth this year are not good. Housing and energy will be bright spots for job creation, but can’t carry the whole burden of restoring employment to its 2007 level.
The labor market does seem to be finding better footing, although the indicators are not strong enough to produce the kind of job growth needed to expeditiously speed the unemployment rate to the Federal Reserve’s 6.5 percent target. February was a decent month for a change, especially for private sector jobs (the ones we want!), let’s hope for a repeat performance. But until owners’ forecast for the economy improves substantially, there will not be much of a boost to hiring and spending from the small business half of the economy.
This survey was conducted in February 2013. A sample of 3,938 small-business owners/members was drawn. Eight hundred seventy (870) usable responses were received – a response rate of 22 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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