Small Business Optimism Up Marginally
Small business optimism sighed in July, with NFIB’s monthly Index increasing just over half a point (0.6) for a total reading of 94.1. This month’s report continues the historically weak trend of owner confidence which has led some observers to suggest that Index should be renamed Small Business Pessimism Index. On the positive front, while the two labor market indicators remained weak, both improved and are beginning to push into "normal" territory. But uncertainty about the future remains endemic among jobs creators, only nine percent of respondents think that now is a good time to expand their businesses.
“In an attempt to 'make lemonade' from the lousy bushel of lemons the administration has handed the small-business community, owners gave the July optimism Index the great distinction of being the fourth highest reading since December 2007-—when the economy slipped into official recession. But let's not get too excited: The level is still well below the average reading of 100 in the prior 35 years and still half a point below the December 2007 reading. Unfortunately, nothing is being done to allay the most pressing concerns identified by job creators—dealing with rising health insurance costs, regulations, tax complexity, energy costs and general economic uncertainty. The President wants a deal on 'corporate taxes', but most small businesses are not incorporated. Energy policy is more confused than ever and the volume of new regulations is mounting. Should I even mention the mounting problems with Obamacare? We are in the 'tankeroo,' not sinking, but trying to stay afloat.” – NFIB chief economist Bill Dunkelberg
This survey was conducted in July 2013. A sample of 10,799 small business owners/members was drawn
and 1,615 usable responses were received for a response rate of 15%.
SBET INDEX SUMMARY
The NFIB Index of Small Business Optimism gained a whoppin’ 0.6 points in July. At 94.1, the Index does not impress and signals nothing but a subpar performance for the 3rd quarter. In an attempt to “make lemonade”, the July reading is the 4th highest reading since December 2007 which was 94.6, well below the average reading of 100 in the prior 35 years and only half a point better than the July reading.
July was another slow month for jobs among NFIB’s 350,000 owners. Nine percent of the owners (down 2 points) reported adding an average of 2.9 workers per firm over the past few months. Offsetting that, 12% reduced employment (unchanged) an average of 2.6 workers (seasonally adjusted), producing the seasonally adjusted gain of negative 0.11 workers per firm. Fifty (50) 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. Basically, owners have stopped reducing employment (historically low percent reporting reductions), so initial claims have been falling, but they have not resumed hiring which would reduce the unemployment rate for good reasons, not because people are leaving the labor force. Twenty (20) percent of all owners reported job openings they could not fill in the current period (up 1 point), a good omen for the unemployment rate. Fifteen (15) percent reported using temporary workers, up 3 points from June. Job creation plans rose 2 points to a net 9% planning to increase total employment, better, the best reading since August 2012. But overall, not a lot of promise for new job growth.
Inventories & 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 one point, rising to a negative 7%. Sixteen (16) percent still cite weak sales as their top business problem, historically high, but far better than the record 34% reading last reached in March 2010. The net percent of owners expecting higher real sales volumes rose 2 points to 7% of all owners (seasonally adjusted), 7 points below the cycle high of a net 14% reached in February 2011, and that was a poor reading. These expectations are not the kind that will generate a lot of new employment or new orders for inventories.
The pace of inventory reduction continued, with a net negative 10% of all owners reporting growth in inventories (seasonally adjusted), 3 points worse than June. For all firms, a net negative 1% (a 1 point improvement) reported stocks too low. The net percent of owners planning to add to inventory stocks was unchanged at a negative 1%, in line with rather poor expectations for sales growth.
The frequency of reported capital outlays over the past 6 months fell 2 points to 54%, 7 points below the average spending rate through 2007. Of those making expenditures, 37% reported spending on new equipment (down 2 points), 21% acquired vehicles (down 2 points), and 13% improved or expanded facilities (down 1 point). Five percent acquired new buildings or land for expansion (down 1 point) and 10% spent money for new fixtures and furniture (unchanged). Reports of outlays fell in all categories except fixtures and furnishings. Overall, this is a weaker spending picture. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 23%. Nine percent characterized the current period as a good time to expand facilities (up 2 points). The net percent of owners expecting better business conditions in 6 months was a net negative 6%, 2 points worse than June. This rather negative outlook for economic growth is not conducive to capital spending that depends on future revenue growth to support it.
Seasonally adjusted, the net percent of owners raising selling prices was 4%, down 4 points. Sixteen (16)% plan on raising average prices in the next few months (down 3 points), and 3% plan reductions (unchanged). Seasonally adjusted, a net 15% plan price hikes, down 3 points. Overall, there is not much pressure on selling prices, with reported and planned price increases mostly offset by actual and planned reductions in selling prices, a fairly benign inflation picture.
Profits & Wages
Reports of positive earnings trends improved a point in July to a negative 22%. Four percent reported reduced worker compensation and 19% reported raising compensation, yielding a seasonally adjusted net 14% reporting higher worker compensation (unchanged). A net seasonally adjusted 11% plan to raise compensation in the coming months, up 5 points.
Five percent of the owners reported that all their credit needs were not met, unchanged and the lowest reading since February, 2008. Thirty (30) percent reported all credit needs met. Only 3% reported that financing was their top business problem compared to 21% citing taxes. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8% (more owners expect that it will be “harder” to arrange financing than easier), 1 point worse than in June but the third most favorable reading since 2007. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 2 points. A net 6% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged from June. The average rate paid on short maturity loans was 5.6%.
COMMENTARY BY CHIEF ECONOMIST BILL DUNKELBERG
Gross Domestic Product (GDP) revisions confirmed what the NFIB survey has been reporting – we are not producing much additional output and not employing many new workers. Growth in the 4th quarter of 2012 was essentially (0.1%), growth in the 1st quarter of 2013 was revised down to 1.1% and the 2nd quarter at 1.7% (first guess). Only 160,000 new jobs (July) would be insufficient to lower the unemployment rate to 7.4% were it not for more people disappearing from the labor force. If you do not want a job, you can not be counted as “unemployed”. Broader measures of unemployment reveal a weak labor market. Much has been made over the high level of job creation in recent months. GDP numbers seem inconsistent, what are they making? July’s job growth is more consistent with the poor GDP numbers.
Meantime, the leadership vacuum continues with Congress unable to negotiate and the President on the campaign trail rarely talking about the big issues while tossing government tidbits to various voter blocks. Employment remains millions below its level in 2008 and only 11% of consumers think government policy is “good” (Reuters/University of Michigan, July survey). This is where we stand after four years of “recovery”.
The amazing stock market continues to surge ahead, even as prospects for earnings growth fade. On Main Street, there is no evidence of profit growth. The economy remains bifurcated, exports turned in a good performance, mostly activity for the large manufacturers, energy companies and agribusiness. Sales for small businesses, especially at service firms, continue to languish. Job openings improved, signaling a tightening in labor markets due as much to departures from the labor force as to the creation of new jobs (of which there were few). But this puts downward pressure on the unemployment rate. Plans to create new jobs also advanced, in spite of pessimistic views of future sales growth, but still historically low and not typical of periods of economic growth.