January Report: Small-Business Owner Confidence Edges Up, Barely
One of the lowest optimism readings in survey history
Small business owner confidence did not rebound in December, according to the NFIB Small Business Optimism Index. While owner optimism crept up 0.5 over November’s historically low report, the 88.0 point reading was still the second lowest since March 2010. December’s poor report resulted largely from a deterioration of labor market components, and the surprising percentage of owners who still expect business conditions to worsen in the next six months
“Congress played chicken right up to the end of the year, leaving small-business owners with no new information about the economy’s future—no sense of how much their taxes would increase or if the economy would go over the now infamous ‘cliff. The eleventh hour ‘deal’ has brought marginal certainty about tax rates and extenders and will provide some relief to owners, but it certainly doesn’t guarantee a more positive forecast for the economy. The January survey results will be far more enlightening about how the sector views the deal—higher taxes and minimal spending cuts may not be a panacea. And let’s not forget what is looming on the horizon: a debate over the debt limit and a regulatory avalanche of historic proportions about to spill out into the country. Happy New Year.” -- NFIB chief economist Bill Dunkelberg
This survey was conducted in December 2012. A sample of 3,938 small-business owners/members was drawn with 648 usable responses were received for a response rate of 16%.
NFIB Chief Economist Explains Latest Findings on CNBC:
The Index is at a recession level reading as pessimism prevails; December’s reading is certainly not typical during a recovery: 70% of owners surveyed characterized the current period as a bad time to expand; one in four of them cite political uncertainty as the top reason. Taxes (23%) and regulations (21%) rank as the top two business problems, with “poor sales” as a close third (19%).
- Sales: Small-business sales showed some improvement, with the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months improving 5 points, but rising only to a negative 10%. Seasonally unadjusted, 18% of all owners reported higher sales (last three months compared to prior three months, down 1 point), and 30% reported lower sales (down 1 point). Consumer spending remains weak, especially on services although auto sales have recently shown some strength. The net percent of owners expecting higher real sales volumes rose 3 points to a negative 2% of all owners (seasonally adjusted), 14 points below the 2012 high of net 12% reached in February. Not seasonally adjusted, 20% expect improvement over the next 3 months (up 1 point) and 40% expect declines (down 3 points).
- Job Creation: Job creation in December was essentially zero, although it improved infinitesimally from the November report. The average change in employment per firm increased to 0.03, up from -0.04 workers, with 11% of surveyed owners (up 1 point) reporting they added an average of 2.9 workers per firm over the past few months, and 13% reducing employment (up 1 points) an average of 1.9 workers (seasonally adjusted). The remaining 76% of owners made no net change in employment. Forty-one percent of the owners hired or tried to hire in the last three months and 33% (80% of those trying to hire or hiring) reported few or no qualified applicants for open positions. Sixteen (16) percent of all owners reported they had hard-to-fill job openings, a drop of 1 point from the previous month. Job creation plans weakened substantially, falling 4 points and indicating that only (a net) one percent of owners plan to increase employment in the months to come. Not seasonally adjusted, seven percent of owners plan to increase employment at their firm (down 4 points), but 11% plan reductions (down 2 points).
- Credit Markets: Desire for new lines of credit is weak among small-business owners; 52% explicitly said they did not want a loan (65% including those who did not answer the question, who are assumed to be disinterested in borrowing). Six percent of owners surveyed reported that all their credit needs were not met, unchanged from November, and 29% reported all credit needs met. Only one percent of owners reported that financing was their top business problem, tied for the lowest reading in survey history. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, down 1 point from November. A net nine percent of small employers reported that loans are now “harder to get” when compared to their last attempt (asked of regular borrowers only), also unchanged from November. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 11% (more owners expect that it will be “harder” to arrange financing than easier), 1 point worse than in November.
- Capital Expenditures: Capital spending remained in “maintenance” mode—historically low—and plans to make capital outlays remained at recession levels. The frequency of reported capital outlays over the past six months fell 1 point to 52%. The percent of owners planning capital outlays in the next three to six months rose 1 point to 20%. Eight percent of owners characterized the current period as a good time to expand facilities (up 2 points), but the net percent of owners expecting better business conditions in six months was a net negative 35%, unchanged from November’s sharp decline. Not seasonally adjusted, 11% of owners expect an improvement in business conditions (up 2 points), and 45% expect deterioration (down 4 points). A net negative 2% of all owners expect improved real sales volumes, up 3 points. Overall, there was no sign that capital spending might be returning to levels more consistent with past recovery periods.
SBET INDEX SUMMARY
The Index gained half a point, rising to 88.0, the second lowest reading since March 2010. This is better than the 81 low reading in the Great Recession, but hardly characteristic of a recovery. Were it not for population growth supporting consumption and net new small business creation, we would have no growth at all.
Overall, owners reported a tiny increase in job creation, adding an average of 0.03 workers per firm, better than November’s -0.04 reading, but both roughly “0”. For the entire sample, 11% of the owners (up 1 point) reported adding an average of 2.9 workers per firm over the past few months, and 13% reduced employment (up 2 points) an average of 1.9 workers (seasonally adjusted). The remaining 76% of owners made no net change in employment. Forty-one percent of the owners hired or tried to hire in the last three months and 33% (80% of those trying to hire or hiring) reported few or no qualified applicants for open positions. The percent of owners reporting hard to fill job openings fell 1 point to 16% of all owners. This measure is highly correlated with the unemployment rate, so the NFIB survey anticipated little or no improvement in the rate. Job creation plans weakened substantially, falling 4 points to a net 1% planning to increase employment. Overall, the NFIB data indicate that job creation was not much different in December, positive but not strong.
INVENTORIES AND SALES
The pace of inventory reduction continued, with a net negative 10% of all owners reporting growth in inventories (seasonally adjusted), unchanged from November. A net 0% (up 2 points) reported stocks too low, historically a high level of satisfaction with stocks. But, with rather dismal sales expectations, plans to add to inventories remained weak at a net negative 4% of all firms (seasonally adjusted), only 1 point better than November.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months improved 5 points to a negative 10%, a step in the right direction, but a small one. The low for this cycle was a net negative 34% (July 2009) reporting quarter over quarter gains. Nineteen (19) percent still cite weak sales as their top business problem, historically high, but down from the record 34% reading last reached in March 2010. The net percent of owners expecting higher real sales volumes rose 3 points to a negative 2% of all owners (seasonally adjusted), 14 points below the 2012 high of net 12% reached in February. Not seasonally adjusted, 20% expect improvement over the next 3 months (up 1 point) and 40% expect declines (down 3 points).
The frequency of reported capital outlays over the past 6 months fell 1 point to 52%, still in “maintenance mode”. Nineteen (19) percent reported “poor sales” as their top business problem, down 4 points as reported sales trends improved 5 points, but still remained negative. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 20%. Eight percent characterized the current period as a good time to expand facilities (up 2 points), historically a very weak number. Overall, not a good environment for investment spending, but at least owners now know their marginal tax rates and can determine “aftertax returns” with more certainty.
Sixteen (16) percent of the NFIB owners reported raising their average selling prices in the past 3 months (up 1 point), and 17% reported price reductions (unchanged)). Seasonally adjusted, the net percent of owners raising selling prices was 0%, unchanged. With sluggish consumer spending, there is little opportunity to raise prices and make it stick. Twenty-two (22) percent plan on raising average prices in the next few months (up 1 point), 3% plan reductions (down 1 point). Seasonally adjusted, a net 16% plan price hikes, unchanged. It appears that the Federal Reserve’s forecast (hope) for continued low inflation is a reality on Main Street.
EARNINGS AND WAGES
Reports of positive earnings trends improved 3 points in December, rising to a net negative 29%, a dismal reading. Four percent reported reduced worker compensation and 13% reported raising compensation, yielding a seasonally adjusted net 13% reporting higher worker compensation (up 6 points). A net seasonally adjusted 5% plan to raise compensation in the coming months, up 1 point from November. These compensation increases are not being passed on to consumers through higher selling prices, which in part explains the poor profit performance.
Six percent of the owners reported that all their credit needs were not met, unchanged from November. Twenty-nine (29) percent reported all credit needs met, and 52% explicitly said they did not want a loan. Only 1% reported that financing was their top business problem, tied for the lowest reading in survey history, compared to 23% citing taxes, 19% citing weak sales and 21% citing regulations and red tape. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, down 1 point from November. A net 9% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged from November. A record low 1% of owners reported financing as their top business problem and a net negative 2% (seasonally adjusted) reported higher interest rates on their most recent loan. Interest rates are not rising.
COMMENTARY BY BILL DUNKELBERG
December was more of the same, uncertainty right up to the last minutes of 2012 and then over the cliff, at least for a few hours. Then something was cobbled together, cans were kicked, taxes went up. What a way to run a business. It’s like the Greek Railroad (ok, the entire Greek government), revenues are far short of labor costs so it borrows money each year to keep operating, building up debt until lenders will no longer pretend to believe that the debt can ever be repaid. Governments have turned into “consols,” no real maturity at which the debt will actually be repaid, just pay the ever increasing cost of servicing the debt until that is so big, they can’t operate any more.
The current Index value of 88 is a recession level reading. There isn’t much else to say beyond that. Inventory demand fell, job creation plans weakened, both from levels that were already in the hole. Capital spending remains weak. Seventy percent of the owners characterize the current period as a bad time to expand; one in four of them cite political uncertainty as the top reason. This “uncertainty” is likely to be a headline player for at least the first half of 2013. As the year progresses, those looking for some meaningful progress on the deficit are likely to be disappointed. Spending will not be cut in any substantial way. Many new “taxes” will be imposed. The Federal Reserve will keep financing the deficit, continually expanding its portfolio. Eventually the Federal Reserve will be able to declare victory (unemployment rate at 6.5%) even if its policies are benign or even mildly counterproductive. The private economy will take care of that in spite of all the impediments government puts in its way. But it could be so much better with some intelligent management.
There will be a few bright spots; housing will recover, driven by demographic necessity (and some weather). That’s a small business industry. Energy will continue to generate jobs. Creating new wells requires all types of labor. However, once drilled, not much labor is required to keep the gas and oil flowing. But cheap oil and gas will create a demand for retrofitting and attract new business that will need new plant and equipment. Car sales will be solid in 2013 as well.
But overall, economic policy will be restrictive. There is no way we can avoid “going over the cliff” in some form or another. Spending must slow and taxes will rise. New income tax rates are now set, but there are many more “hidden” taxes. There will be reductions in spending somewhere, and that’s a reduction in incomes for some workers and firms. Whatever the resolution of the “cliff”, it will not provide a stimulus unless it somehow turns out to be a very sensible bargain which makes consumers and owners more optimistic about the future. Health care costs are rising as well. Minimum wages are rising, impeding job creation. Our trading partners are weaker, reducing export demand. Consumers still have a debt hangover from the party. All this “sludge” on the road will reduce the speed of economic growth.