Small Business Economic Trends - October 2012
Summary
OPTIMISM INDEX
The Optimism Index lost 0.1 points, falling to 92.8. Since monthly surveys were started in 1986, the Index has been below 93.0 fifty-six times, and 32 of those low readings have occurred since the recovery began in June 2009. News on the economy didn’t really change and neither did business owner’s views of the future for the economy – it’s as uncertain as it has been all year. Views about the current period as a “good time to expand” did gain 3 points, and the number of owners expecting business conditions to be better in six months gained 4 points over the pessimists, landing at a net 2 percent. However, these are hardly strong readings, even if improved.
LABOR MARKETS
Consumer spending has barely advanced this year, and consequently so has job creation. Employment is still 4 million lower than it was in the first quarter of 2008 (first quarter). The population grows about 1 percent annually. A few more jobs are needed to take care of that, and that seems to be about all we are getting. The percent of owners reporting hard to fill job openings fell 1 point to 17 percent of all owners, no help for a lower unemployment rate. Seasonally adjusted, the net percent of owners planning to create new jobs fell 6 points to 4 percent, a historically weak reading, especially in a recovery. Owners remained pessimistic about the future in September and consequently hiring plans remain weak. Reported job creation for the past few months was negative. More workers let go than hired, signaling a weak BLS jobs report for September, around 100,000 new jobs overall.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months fell 4 points to 51 percent, still in “maintenance mode.” Overall, there was a substantial reduction in capital spending activity. A net 1 percent of all owners expect improved real sales volumes, unchanged after a 5 point gain in August. Twenty-one (21) percent reported “poor sales” as their top business problem, up 1 point. Overall, the survey shows no improvements in the capital spending indicators. The percent of owners planning capital outlays in the next 3 to 6 months fell 3 points to 21 percent. Seven percent characterized the current period as a good time to expand facilities (up 3 points, seasonally adjusted) compared to 14 percent in September 2007. The net percent of owners expecting better business conditions in 6 months rose 4 points to 2 percent after posting a 6 point improvement last month. But this is still a collectively pessimistic view.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was unchanged at a negative 13 percent. The five year high of a net 4 percent was reached in April. The low for this cycle was a net negative 34 percent, last reached in July 2009. Twenty-one (21) 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 was unchanged at 1 percent of all owners (seasonally adjusted), down 11 points from the year high of net 12 percent in February. This is a weak reading, not likely to trigger orders for new inventory or business expansion. The pace of inventory reduction slowed, with a net negative 8 percent of all owners reporting growth in inventories (seasonally adjusted), a 1 point deterioration. For all firms, a net negative 1 percent (down 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 than plan to add new stocks.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was 6 percent, down 3 points. The dramatic price cutting that characterized the recession is over and price pressures have returned to normal ranges in the NFIB survey. Recent readings are consistent with moderate inflation on Main Street, but rising energy prices will produce more headline inflation. Seasonally adjusted, a net 19 percent plan price hikes, up 2 points.
EARNINGS AND WAGES
Reports of positive earnings trends improved one point, rising to a net negative 27 percent in 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. The past and promised increases in regulatory costs and taxes will diminish the available financial support for growth, as well as reduce the expected profitability associated with new investments in the business or new hires. Two percent reported reduced worker compensation and 16 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation, up 1 point. A net seasonally adjusted 10 percent plan to raise compensation in the coming months, unchanged from August.
CREDIT MARKETS
There were no interesting developments in credit markets in September. The average rate paid on short maturity loans was 5.7 percent, stuck at much the same level for years even though the one year Treasury rate is barely above 0 percent. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 1 point from August. Eight percent of owners reported that all their credit needs were not met, also up 1point. Thirty-two (32) percent reported all credit needs met, and 50 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem, compared to 21 each percent citing taxes, weak sales and unreasonable regulations and red tape.
COMMENTARY
Uncertainty has cast a cloud over the future for small business owners, making it difficult to make commitments to new spending and hiring. In a recently released NFIB Problems and Priorities survey (available at nfib.org/research), owners rated the severity of 75 business issues. Uncertainty about the economy ranked second while uncertainty about government policy ranked fourth. For perspective, securing long term funding was 56th and finding qualified workers 32nd. With a 50/50 election, according to the polls, and very different sets of policies that might be put in place, owners are unwilling to put their own capital on the line until the future path of the economy and economic policy becomes clearer.
MOST IMPORTANT PROBLEM: 2012
1. Rising Cost of Health Care Insurance
2. Uncertainty over Economic Conditions
3. Energy Costs
4. Uncertainty over Government Actions
5. Unreasonable Government Regulations
6. Federal Taxes on Business Income
7. Tax Complexity
8. Frequent Changes in Federal Tax Laws and Rules
9. Property Taxes
10. State Taxes on Business Income
25. Finding Out About Regulatory Requirements
31. Competition from Large Businesses
32. Finding Qualified Employees
56. Obtaining Long-Term Business Loans
Obviously, taxes and regulations are high on the list of concerns of business owners and these are issues that politicians will be addressing as the election approaches. Politicians have little understanding of the costs their actions impose on the private sector. “Frequent changes in the tax code” should not consistently rank in the top 15 problems that owners face.
Labor market indicators remained weak, providing little hope for a recovery in employment. Capital spending plans, inventory investment plans, hiring plans were all soft, so prospects for more rapid growth in GDP are dim unless the election outcome produces euphoria (and more spending) among a significant segment of consumers. Economic activity appears to be driven mostly by population growth; there isn’t much beyond the 1 percent in growth this produces.
This survey was conducted in September 2012. A sample of 3,938 small-business owners/members was drawn. Six hundred ninety-one (691) usable responses were received – a response rate of 18 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.
