Small Business Economic Trends - March 2014
SUMMARY
OPTIMISM INDEX
The Small Business Optimism Index fell 2.7 points to 91.4, a substantial reversal in an unexciting January measure but ends a 3 month improvement trend. Only one of the Index components improved, three were unchanged, and six were lower, indicating that the small business half of the economy is still adding little to growth beyond that needed to support population growth. The substantial decline in the Index is consistent with the prospect that GDP growth will remain in the mid 2 percent range barring some exceptional good news, unlikely in this election year.
LABOR MARKETS
Forty-seven (47) percent of the owners hired or tried to hire in the last three months and 40 percent reported few or no qualified applicants for open positions. Twenty-two (22) percent of all owners reported job openings they could not fill in the current period (unchanged). This suggests that the unemployment rate did not change much in February. Thirteen (13) percent reported using temporary workers, down one point from January. Job creation plans gave up January’s welcome gain, falling 5 points to a seasonally adjusted net 7 percent. NFIB owners increased employment by an average of 0.11 workers per firm in February (seasonally adjusted), virtually unchanged from January. Seasonally adjusted, 12 percent of the owners (down 1 point) reported adding an average of 3.0 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (down 1 point) an average of 2.7 workers.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 2 points to a net negative 8 percent, typical of the 2013 experience. Sixteen (16) percent cite weak sales as their top business problem, still above levels experienced in “normal” times. The net percent of owners expecting higher real sales volumes plunged 12 points to 3 percent of all owners, reversing our previous gains.
The pace of inventory reduction continued, with a net negative 2 percent of all owners reporting growth in inventories (seasonally adjusted), two points lower than January and trending toward balance. However, stocks are still considered excessive in spite of this long period of net reductions. The net percent of owners viewing current stocks as “too low” deteriorated 2 points to a net negative 4 percent. This is due primarily to a large deterioration in sales expectations. Consequently, the net percent of owners planning to add to inventory stocks fell 2 points to a net negative 5 percent indicating little appetite to add to stocks in the current environment.
CAPITAL SPENDING
Fifty-seven (57) percent reported outlays, down 2 points from January and typical of reports in recent months. The small business sector remains in maintenance mode, no expansion beyond new firm starts in response to regional population growth. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 25 percent. Of the 59 percent of owners who said it was a bad time to expand, 27 percent still blamed the political environment, suggesting that at least for these owners, politicians are preventing their spending on expansion by failing to resolve important issues for owners (healthcare law, taxes, regulations and red tape, etc.).
INFLATION
Fifteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 2 points), and 19 percent reported price increases (up 2 points). Seasonally adjusted, the net percent of owners raising selling prices was a net 1 percent, down point. Twenty-seven (27) percent plan on raising average prices in the next few months (up 2 points), and 3 percent plan reductions (unchanged). Clearly, reality is preventing firms from implementing the price hikes they would like to have. Seasonally adjusted, a net 23 percent plan price hikes (up 4 points), a long way from the net 1 percent reporting higher actual prices in recent months.
EARNINGS AND WAGES
Earnings trends were stable at a miserable net negative 27 percent (net percent reporting quarter to quarter earnings trending higher or lower). Pressure from labor costs that can’t be passed on is keeping pressure on earnings gains. Two percent reported reduced worker compensation and 23 percent reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (unchanged), the best readings since 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months, up 3 points from January. With a net 19 percent raising compensation but a net 1 percent raising selling prices, it is easy to see why profits remain under pressure. Higher compensation costs are not being passed on to customers.
CREDIT MARKETS
Five percent of the owners reported that all their credit needs were not met, 1 point above the record low. Twenty-nine (29) 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. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point and only 2 points above the record low. A net 8 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), 2 points higher than January. The average rate paid on short maturity loans was down a bit at 5.4 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 7 percent as more owners expect that it will be “harder” to arrange financing than easier, unchanged from January and little changed over the past few years.
COMMENTARY
The one “green shoot” in the January survey, a surge in hiring plans, was crushed by the continued onslaught of a wintry recovery now in its 5th year. The February report on net new jobs was better than expected, but inadequate to the task of reducing the unemployment rate which rose a tenth of a point. As disturbing as the decline in job creation plans was, the plunge in expectations for improvements in real sales in the coming months and for business conditions 6 months from now, undoubtedly the reason for the decline in hiring plans. Averaging 22 percent from 1973 through 2007, a net 22 percent expected real sales volumes to rise in the following 3 month period. In February, it was a meager net 3 percent.
Uncertainty is a major cause of the reluctance to spend and hire. Large firms are loaded with cash but unwilling to spend. For small firms, record low numbers are reporting the current period as a good time to expand, for 5 years and running. More firms are reducing inventory than adding to it, even in a growing economy. And more firms are expecting a deterioration in the economy than an improvement. In NFIB’s Problems and Priorities survey, uncertainty about the economy and government policy both rank in the top 5 most severe problems facing small business owners. You don’t bet your money on a future you cannot see clearly.
The Federal Reserve now holds more government bonds than either Japan or China and remains the major buyer of mortgage securities. In the “olden days” banks made mortgages, lending out depositors money to credit worthy home buyers. Now the regulatory cost of making mortgages is so large that only a few big banks will do it. Regulators no longer allow banks to lend for 30 years and finance with short-term deposits. This risk is dumped onto the taxpayer.
The economy is not doing well and little is happening in Washington that would lead owners to think otherwise. Even the Federal Reserve’s guidance is for a weak economy, that’s what owners read and they are the experts (and policy makers). All policy is focused on the election, pandering to special interests, not the interests of the “middle class” (most of us) which simply wants to see better economic growth and serious job creation (along with improving compensation). Consumer sentiment is equally morose for this stage of a “recovery”. Only 1 in 10 consumers think government policy is good. The IRS is still taking the 5th and the DOJ investigator sends campaign money to the Democrat party. None of the “issues” are resolved; those involved hoping to stall long enough for other crises to shove them off the front pages - maybe Putin will save them. But the stock market is hitting new highs so I guess we should all cheer.
This survey was conducted in February 2014. A sample of 3,938 small-business owners/members was drawn. Seven hundred ninety-two (792) usable responses were received – a response rate of 20 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2014, the NFIB retains ownership. All Rights Reserved.
