Small Business Economic Trends - November 2013
SUMMARY
OPTIMISM INDEX
The NFIB Index of Small Business Optimism lost 2.3 points to 91.6. Two components, the outlook for business conditions and the outlook for real sales gains, accounted for 52 percent of the Index decline. A weaker outlook for business produced dissatisfaction with inventory stocks, and fewer plans to create new jobs. The average value of the Index since the recovery started is 91, 8 points below the 35 year average through 2007 and well below readings typically experienced in a recovery. The current reading is hardly something to cheer about. It is very hard to identify any current developments that would make owners more optimistic. The new budget deadline of January 15, 2014 is approaching quickly and Congress continues to wrangle over the healthcare law and little else.
LABOR MARKETS
Twelve percent of the owners (up 1 point) reported adding an average of 3.5 workers per firm over the past few months. Offsetting that, 9 percent reduced employment (down 2 points) an average of 2.8 workers (seasonally adjusted), producing the seasonally adjusted gain of 0.11 workers per firm overall. The remaining 79 percent of owners made no net change in employment. Fifty-one percent of the owners hired or tried to hire in the last three months and 40 reported few or no qualified applicants for open positions. Reports of workforce reductions have reached normal or sub-normal levels, explaining the favorable levels of initial claims for unemployment. Nine percent reported reducing employment, the lowest reading since 2006. But owners report sub-par levels of hiring, so job growth remains anemic even with low levels of initial claims. Twenty-one percent of all owners reported job openings they could not fill in the current period (up 1 point), a positive signal for the unemployment rate. But, job creation plans lost 4 points from September, landing at a net 5 percent.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior three months deteriorated 2 points to a negative 8 percent. Seventeen percent still cite weak sales as their top business problem. The net percent of owners expecting higher real sales volumes fell 6 points to 2 percent of all owners (seasonally adjusted). Not much help for hiring or inventory investment in those numbers.
The pace of inventory reduction continued, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted), 1 point better than September. The net percent of owners planning to add to inventory stocks was a net negative 1 percent. The negative outlook for the economy and real sales prospects adversely impacted inventory satisfaction. The net percent of owners viewing current stocks as too low fell to a net negative 5 percent, the worst reading since 2011.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose 2 points to 57 percent, the best showing since January, 2008 -- improved, but still relatively weak. A net 2 percent of all owners expect improved real sales volumes, down 6 points. Seventeen percent reported “poor sales” as their top business problem, unchanged from September. Reported sales trends deteriorated 2 points to a net negative 8 percent. Overall, the environment for capital spending deteriorated as what little confidence owners had in the future eroded further. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 23 percent. Six percent characterized the current period as a good time to expand facilities (down 2 points).
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was 5 percent, up 4 points. Twenty percent plan on raising average prices in the next few months (unchanged), and 3 percent plan reductions (up 1 point). Seasonally adjusted, a net 18 percent plan price hikes, down 1 point. Not much of this is likely to “stick” if owners are correctly forecasting the future of the economy over the next six months.
EARNINGS AND WAGES
Earnings trends did not improve in October, holding at a negative 23 percent. Two percent reported reduced worker compensation and 18 percent reported raising compensation, yielding seasonally adjusted net 16 percent reporting higher worker compensation (down 1 point). A net seasonally adjusted 10 percent plan to raise compensation in the coming months, down 3 points. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery. This is consistent with the macro reports about weak growth in income and compensation. With a net 16 percent raising compensation but a net 5 percent raising selling prices, profits will continue to be under pressure.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, unchanged from September. Twenty-eight 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-eight percent of all owners reported borrowing on a regular basis, down 2 points and a record low. A net 6 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 1 point from September. 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 September. A surprising result in an economy with the most aggressive monetary policy in history.
COMMENTARY
Typical of the reporting by the “mainstream media” on the economy, CNN (Your Money, Nov 2) asserted that stingy credit was dragging down the small business sector; no mention of the impact of Washington antics. Banks are once again being blamed for the slow recovery, not the Administration’s policies (or lack thereof). However, only 2 percent of NFIB members cite credit and interest rates as their top business problem, and a record 66 percent expressed no interest in a loan, obviously due to their dismal view of the future of the economy. It’s not a problem of credit supply; it’s a lack of credit demand due primarily to poor economic prospects. Consumer sentiment is sympathetic to that notion as optimism posted declines in October, signaling that customers are less optimistic as well.
The healthcare law is revealing itself to be everything opponents feared. But what else could be expected when a few hundred people (in one party) decide to restructure 15 percent of the economy. Nobody read the bill, nobody understood the whole thing, the big picture. Now, as it dissembles, a panicked Administration is throwing even more tax dollars at the project in an effort to stem the hemorrhaging. No surprise in Washington, apparently firms that supported the Obama campaign were awarded contracts for most of the work. Kind of like giving Ms. Pelosi’s husband the exclusive right to dispose of our unneeded post office real estate - what a deal.
The Optimism Index gave up 2.3 points, falling to the average reading in the recovery of about 91.0. No progress. The outlook for business conditions continued to deteriorate, giving up 15 percentage points over the past two months. Plans to hire, expand, make capital outlays, and order more inventory were all weak. Consumers are pessimistic, with sentiment measures falling and fewer than 1 in 10 characterizing government policy as “good”. The misstatements, exaggerations and distortions being pitched to the public are stunning, but after all, these are politicians.
Federal Reserve policy becomes more tenuous as time passes, with many observers believing that QE should end, but it doesn’t, limping on toward another trillion dollars of bond purchases. Shoving too much fuel into the engine can produce a stall. Certainly job growth is not responding, only the counter-factual could justify keeping the foot on the gas pedal. The larger the Fed portfolio, the greater the uncertainty about the consequences of “normalizing” policy, whatever that may mean anymore. And the longer the Fed distorts prices (assets, interest rates), the larger the misallocation of resources that results and the more painful when reality sets in – and it must.
The most critical issues for small business owners are rising health insurance costs, uncertainty about the economy and about economic policy, energy costs, the cost of regulation and red tape and a multitude of issues with the tax code (complexity, frequent changes, loss of profits to fund growth). None of these issues has improved and the prospects are not bright. So, owners will continue to be very cautious, operating in maintenance mode until the future for the economy becomes clearer.
This survey was conducted in October 2013. A sample of 10,799 small-business owners/members was drawn. One thousand eight hundred and seventy-three (1,940) 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.
