Small Business Economic Trends - November 2012
Summary
OPTIMISM INDEX
The Optimism Index gained 0.3 points, increasing to 93.1. In the 40 months since the “recovery” started in July 2009, the Index has been higher only eight times. And, it has never exceeded 95. The pre-recession average for the Index is 100. There is nothing of note in the composition of last month’s Index improvement. All the changes were small and have varied randomly for the past few years, keeping the Index in a narrow “recession” level range, vacillating between 88 – 94 for much of the last three years. Of note is the percentage of owners who are uncertain as to whether business conditions will be better or worse six months from now. It hit a survey record high, beating the previous record reached in the Carter Administration by 8 percentage points. Not knowing the direction of the economy will always have a dampening impact on spending and hiring.
LABOR MARKETS
Owners slowed the reduction of workers in the October survey, raising the average change in employment per firm to 0.02 workers, up from a seasonally adjusted -0.23 in September. The improvement ended a run of 4 months of employment reductions. Seasonally adjusted, 11 percent of the owners reported adding an average of 2.7 workers per firm over the past few months, and 10 percent reduced employment an average of 2.9 workers. The remaining 79 percent of owners made no net change in employment. The percent of owners reporting hard to fill job openings fell 1 point to 16 percent of all owners, the second monthly decline in a row. Job creation plans remained weak, with a net 4 percent planning to increase employment, unchanged from September and 6 points below the August reading.
CAPITAL SPENDING
The frequency of reported capital outlays over the past 6 months rose 3 points to 54 percent, still in “maintenance mode.” Of those making expenditures, 37 percent reported spending on new equipment (up 3 points), 19 percent acquired vehicles (up 3 points), and 14 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (up 2 points) and 12 percent spent money for new fixtures and furniture (unchanged). Overall, there was no sign that capital spending might be returning to levels more consistent with past recovery periods. The percent of owners planning capital outlays in the next 3 to 6 months rose one point to 22 percent. Seven percent characterized the current period as a good time to expand facilities (unchanged) compared to 14 percent in September 2007. The net percent of owners expecting better business conditions in 6 months was also unchanged at a net 2 percent, hardly an optimistic outlook. Overall, the survey shows no improvements in the capital spending indicators.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was negative 15 percent, 2 points worse than in September, confirming the weak growth in non-durable consumer spending in the third quarter. Twenty-two (22) percent still cite weak sales as their top business problem, historically high, but down from the record 34 percent reading last reached in March 2010. The net percent of owners expecting higher real sales rose 2 points to 3 percent of all owners (seasonally adjusted). The reading is down 9 points from the year high of net 12 percent reached in February. The pace of inventory reduction continued, with a net negative 8 percent of all owners reporting growth in inventories (seasonally adjusted), unchanged from September. For all firms, a net 0 percent (up 1 point) reported stocks too low, still a very positive report as this indicates minimal excess inventory in the hands of owners. Plans to add to inventories remained weak at a net negative 1 percent of all firms (seasonally adjusted), more plan to reduce stocks than plan to increase them.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was 5 percent, down 1 point. With sluggish consumer spending, there is little opportunity to raise prices and make it stick. Nineteen percent plan on raising average prices in the next few months (down 2 points), 4 percent plan reductions (up 1 point). Seasonally adjusted, a net 16 percent plan price hikes, down 3 points. It appears that the Fed’s forecast (hope) for continued low inflation is a reality on Main Street.
PROFITS AND WAGES
Reports of positive earnings trends improved one point, rising to a net negative 26 percent in October. Four percent reported reduced worker compensation and 15 percent reported raising compensation, yielding a seasonally adjusted net 11 percent reporting higher worker compensation (down 3 points). A net seasonally adjusted 9 percent plan to raise compensation in the coming months, down 1 point from September. Earnings are the major source of capital for small firms to finance growth and expansion (and repay debts incurred to invest in their firms).
CREDIT MARKETS
Eight percent of the owners reported that all their credit needs were not met and only 3 percent reported that financing was their top business problem, compared to 20 percent citing taxes, 22 percent citing weak sales and 19 percent citing unreasonable regulations and red tape. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8 percent, 1 point worse than in September. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point from September. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), 1 point higher than September. The average rate paid on short maturity loans was 5.8 percent.
COMMENTARY
The labor markets regained their statistical footing. After California “went missing” in the claims reports, jobless claims rose to nearly 392,000 the week after and fell to 369,000 after that. These are numbers more consistent with the current level of economic activity. Five million workers are still “long term unemployed,” 40 percent of the total pool of unemployed. The average duration of unemployment is about 40 weeks (median is 20), historically very high. The labor force participation rate is under 64 percent, below the 66 percent pre-recession level. This explains a large share of the decline in the unemployment rate; people who give up looking for a job and leave the labor force are not “unemployed.” The 893,000 new jobs in the Household Survey (largely part-time) were inconsistent with private GDP growth of 1.3 percent. Historically, such a large number occurred during strong growth, as in June 1993 when GDP grew at an 8 percent annual rate.
Uncertainty about the election has been a major impediment to spending because the Presidential candidates offered very disparate policies for the economy. That is now resolved. We invested $2 billion and lots of time in “change” but the day after the election looked pretty much like the day before: same President, same Senate and House, more or less. Certainly the major players on the stage are the same, the question is has the script changed? If the Republicans were looking for a new cast and an opportunity re-write the past, that hope is gone. If the President was looking for a re-take of the House, that cast will be the same as well. But, the play must go on and it will. Only a re-write of the script by both casts will produce progress. But writers haven’t talked for months....
Investors who had bet on a change expressed their discontent with a major sell-off in the stock market. This of course creates buying opportunities for those who were hoping for no change and got it. There will be many autopsies of the now deceased election results, and many explanations of the outcome. For small business owners, all the uncertainties remain although the odds of resolving them in one direction or another will have changed for many. But overall, it is now unlikely that anything will happen in November to make them more optimistic about the future, as has been the case for many months, even years now. Let’s see what the New Year and the new Congress brings, as it is likely that current Congress will simply “kick the can” at least until January. One thing for sure, the economic pressure to do something will be large indeed. The November survey will reveal a combination of the effects of the election and hurricane Sandy. Regional differences in the performance measures should be large. Stay tuned.
This survey was conducted in October 2012. A sample of 10,799 small-business owners/members was drawn. Two thousand and twenty-nine (2,029) usable responses were received – a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.
