Small Business Economic Trends - September 2012
Summary
OPTIMISM INDEX
The Optimism Index gained 1.7 points, rising to 92.9. Although an improvement, the number is still another solid recession reading. There were some positive signs however, the employment indicators for the fourth quarter improved substantially as did plans for capital outlays. However, few think the current period is a good time to expand at 4 percent. The percent of owners viewing the current period as a BAD time to expand due to political uncertainty reached a new record high for this business cycle at 22 percent.
LABOR MARKETS
The reported net change in employment per firm over the past few months (seasonally adjusted) was -.05, a bit worse than July’s -.04 and the third negative months in a row. Both readings are essentially “zero” for job growth at existing firms. Current job creation is being driven by new firms to serve the millions of new consumers added each year due to population growth. Seasonally adjusted, 12 percent of the owners reported adding an average of 2.7 workers per firm over the past three months, and 10 percent reduced employment an average of 2.5. The remaining 78 percent of owners made no net change in employment. Forty-nine (49) percent of the owners hired or tried to hire in the last three months and 37 percent reported few or no qualified applicants for open positions. The percent of owners reporting hard to fill job openings rose 3 points to 18 percent of all owners, a good sign. Job openings are highly correlated with the unemployment rate, so the August survey offers some hope of an improvement.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months gained 1 point to 55 percent. The frequency of reported outlays has gained a few points in recent months but not enough to get out of the rut they have been stuck in since early 2008. Spending activity picked up in several categories but it was not enough to really ramp up overall spending. The percent of owners planning capital outlays in the next 3 to 6 months gained 3 points to 24 percent. Twenty (20) percent reported “poor sales” as their top business problem, unchanged. A few bright spots as some expectation measures improved, but to levels that are still not typical of a recovery period.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 4 points, falling to negative 13 percent. Twenty (20) percent still cite weak sales as their top business problem, historically high, but down from the record 33 percent reading in December 2010. The net percent of owners expecting higher real sales rose 5 points, rising to a net 1 percent of all owners (seasonally adjusted), ending a five month decline of 16 percentage points. Still, this is a weak reading and not likely to trigger orders for new inventory or business expansion. The pace of inventory reduction slowed, with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), a 3 point improvement. With weak sales and sour expectations for any meaningful sales growth, owners continue to meet current demand which is weak. For all firms, a net 0 percent (unchanged) reported stocks too low, a very positive report as this indicates minimal excess inventory being held. Plans to add to inventories remained weak a net negative 1 percent of all firms. With expected business conditions and expected real sales still delivering poor readings, it is not surprising that inventory demand remains weak.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was 9 percent, up 1 point and continuing a longer trend of more frequent reports of higher selling prices. The historic low of -24 was reached in April 2009 when far more owners were cutting prices than increasing. That’s done now. Still, recent readings are consistent with moderate inflation on Main Street. But with rising energy prices, more inflation is likely to appear in the inflation measures. Overall, there is relatively little pressure on selling prices. Eighteen (18) percent plan on raising average prices in the next few months (unchanged), 3 percent plan reductions (unchanged). Seasonally adjusted, a net 17 percent plan price hikes, unchanged from July.
PROFITS AND WAGES
Reports of positive earnings trends gave up one point, falling to a negative 28 percent in August after falling 12 points in June and July. Three percent reported reduced worker compensation and 17 percent reported raising compensation, yielding a seasonally adjusted net 13 percent reporting higher worker compensation (up 1 point). A net seasonally adjusted 10 percent plan to raise compensation in the coming months, up 2 points. Earnings are the major source of capital for small firms to finance growth and expansion. The past and promised increases in regulatory costs and in 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.
CREDIT MARKETS
There were no interesting developments in credit markets. Seven percent of the owners reported that all their credit needs were not met, unchanged. Thirty-one (31) percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem, compared to 23 percent citing taxes, 20 percent citing weak sales and 21 percent naming unreasonable regulations and red tape. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point from July. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged.
COMMENTARY
As expected, there was no real change in owner optimism in August since nothing happened to make owners more confident about the future. Consumers were equally unimpressed according to the University of Michigan/Reuters survey. The survey shows only 12 percent of consumers think the government is doing a good job and 46 percent feel government is doing a bad job. And while the top ranked problem (out of 75) in the recently released NFIB Problems and Priorities survey was health insurance costs, the second and fourth ranked problems were “uncertainty about the economy” and “uncertainty about government policy.” This goes a long way toward explaining why spending seems to be in “maintenance mode.” With 50/50 odds in the polls, the president will be determined by the flip of a coin. The policy outcomes depending on who wins appear to be hugely different, and consequently, owners are not betting their hard earned money on the flip of a coin. They are waiting for more certainty about the direction of the economy and policy.
Since 1986 when NFIB started the monthly surveys, the Index has been below 93 for a total of 50 months. Forty-three (43) of them have occurred in the current “recovery” which began in June 2009. That says it all about this recovery. Index readings of a typical recovery are generally above 100, the average historical reading.
Always looking for something positive in these dreary numbers, the labor market readings were very solid, with the best hiring plans number in 53 months and a 3 point gain in the job openings indicator. Good for the future, but really no good news about recent months, job creation for existing firms was still basically nil. Job creation in the private sector will depend on large firm hiring, if any, and jobs at new firms that are being created by population growth. Capital spending stirred a point and plans rose 3 points, but still recession type readings. And expectations for real sales gains and for business conditions six months out did improve, but also remain at recession levels.
Some Fed officials still talk about the unwillingness of banks to lend, and for some troubled banks, that might be the case. But these are few in number compared to the number of independent banks available and bankers continue to complain about a dearth of qualified applicants, a position supported by the NFIB surveys. QE3 seems to be creeping toward existence, but opposition is stiff and logical – who hasn’t already responded to record low mortgage rates? What firms didn’t pull the trigger on a project but for a quarter point rate differential? Indeed, if banks are reluctant, it may be due to the Fed’s engineered low rates, too low for ordinary banks to risk locking in for long periods of time. Yes, there might be a third stock market pickup from QE3, but this really isn’t going to get consumers to spend more, it would just be a gift to TBTF banks and traders. And it’s likely to be a very small response. The Fed may be way off its unemployment target (not specified), but QE3 will not have an impact on employment. It will make the Fed’s “unwinding” job more difficult and exposes the Fed to the risk of discovering that “the Emperor wears no clothes.”
This survey was conducted in August 2012. A sample of 3,938 small-business owners/members was drawn. Seven hundred forty (736) 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.
