Small Business Optimism Dives in June
3-point Drop Lowest Level Since October 2011
The Index of Small Business Optimism declined 3 points in June, falling to 91.4. The decline is significant, relinquished the gains achieved earlier this year and is a clear indication of slow growth. Only one of the 10 Index components improved, expected credit conditions. Nearly one-quarter of owners cite weak sales as their most important business problem (23%), followed by taxes (21%) and unreasonable regulations and red tape (19%).
The report is based on the responses of 740 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of June 2012.
- Capital Expenditures: Overall, the stats on capital expenditures are consistent with the sluggish performance of the economy. The frequency of reported capital outlays over the past six months dropped 3 points to 52%, failing to get out of the rut carved out in mid-2008. Of those making expenditures, 37% reported spending on new equipment (unchanged), 18% acquired vehicles (down 6 points), and 11% improved or expanded facilities (down 3 points). Five percent acquired new buildings or land for expansion (down 2 points) and 13% spent money for new fixtures and furniture (unchanged). The percent of owners planning capital outlays in the next three to six months declined 3 points to 21%. Only five percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 2 points. The net percent of owners expecting better business conditions in 6 months was a negative 10% (an 8 point decline). Not seasonally adjusted, 25% expect deterioration in business conditions (a 5-point increase), and 14% expect improvement (down 4 points).
- Sales: The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 7 points, falling to negative five percent, this after reaching a five year high of a net four percent in April. The low for the cycle was a net negative 34% (July 2009) reporting quarter over quarter gains. Twenty-three (23) percent still cite weak sales as their top business problem, historically high, but down from the record 33% reading in December 2010. Seasonally unadjusted, 26% of all owners reported higher sales (last three months compared to prior three months, up 1 point) while 28% reported lower sales (up 1 point). Consumer spending remains weak, especially on services. The net percent of owners expecting higher real sales lost 5 points, falling to a net negative three percent of all owners (seasonally adjusted), producing a four month decline of 15 percentage points. Not seasonally adjusted, 29% expect improvement over the next three months (down 7 points) and 25% expect declines (up 4 points). Expectations this weak are not likely to generate job creation or inventory investment.
- Job Creation: Posting the first negative reading since December, the net change in employment per firm over the past few months (seasonally adjusted) was -0.11. Seasonally adjusted, nine percent of the owners added an average of 2.6 workers per firm over the past few months, and 12% reduced employment by an average of 2.8 workers. The remaining 79% of owners made no net change in employment. Forty-four (44) percent of the owners hired or tried to hire in the last three months and 33% reported few or no qualified applicants for positions. The percent of owners reporting hard to fill job openings lost 5 points, falling to 15% of all owners. This was a strong reversal of May’s result and suggests the unemployment rate will rise. Not seasonally adjusted, 10% plan to increase employment at their firm (down 7 points), six percent plan reductions, up 1 point. Seasonally adjusted, the net percent of owners planning to create new jobs fell 3 points to three percent, an unfortunate reversal of two months of improved readings.
There was no good news in the June survey. The Small Business Optimism Index posted a decline of 3 points, falling to 91.4. This is a clear indication of slow growth. Only one of the ten Index components improved, expected credit conditions. Labor market indicators, spending plans for capital equipment and inventories took a drubbing, accounting for about 40% of the decline. Neither the Supreme Court's decision on healthcare nor the highway spending bill effects are included in the June data.
Forty-four (44) percent of the owners hired or tried to hire in the last three months and 33% reported few or no qualified applicants for positions. The figures suggest that job creation has been very weak. While reports of reductions in employment have returned to “normal” levels, the percent reporting increases in employment has not. The percent of owners reporting hard to fill job openings lost 5 points, falling to 15% of all owners. The Household survey indicates that about 3/4s of the increase in jobs last month were “part time for economic reasons.” That is not a strong labor market. Seasonally adjusted, the net percent of owners planning to create new jobs fell 3 points to 3%, an unfortunate reversal of three months of improved readings. This is definitely not typical of an expansion.
Inventories and Sales
With the large decline in reported positive sales trends, it is surprising that this indicator did not worsen. For all firms, a net 0% (unchanged) reported stocks too low, a very positive report. Overall, it appears that small business owners have reduced inventories to acceptable levels given the outlook for sales growth which deteriorated from May figures. Plans to add to inventories lost 2 points, falling to a net 0% of all firms (seasonally adjusted). With expected business conditions and expected real sales delivering poor readings, it is not surprising that inventory demand remains weak. The pace of inventory reduction slowed a bit, with a net negative 7% of all owners reporting growth in inventories (seasonally adjusted), a 1 point improvement.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 7 points, falling to negative 5%, this after reaching a 5 year high of a net 4% in April.
Twenty-three percent still cite weak sales as their top business problem, historically high, but down from the record 33% reading in December, 2010. The net percent of owners expecting higher real sales lost 5 points, falling to a net negative 3% of all owners (seasonally adjusted), producing a 4 month decline of 15 percentage points.
The frequency of reported capital outlays over the past six months dropped 3 points to 52%. So, it appears that spending remains in “maintenance” mode. The percent of owners planning capital outlays in the next 3 to 6 months declined 3 points to 21%, a dispiriting result. Only five percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 2 points. Of those making expenditures, 37% reported spending on new equipment (unchanged), 18% acquired vehicles (down 6 points), and 11% improved or expanded facilities (down 3 points). Five percent acquired new buildings or land for expansion (down 2 points) and 13% spent money for new fixtures and furniture (unchanged). Overall, the stats are consistent with the sluggish performance of the economy.
Twenty-one (21) percent of the NFIB owners reported raising their average selling prices in the past 3 months (unchanged), and 19% reported price reductions (up 2 points). Seasonally adjusted, the net percent raising selling prices was 3%, unchanged from May. There isn’t much pressure on prices coming from Main Street, good news for the Federal Reserve. Seventeen (17) percent plan on raising average prices in the next few months (down 3 points after a 5 point decline in May), 3% plan reductions. Seasonally adjusted, a net 16% plan price hikes, down 1 point. Clearly, many owners do not see demand as strong enough to support higher selling prices.
Earnings and Wages
Reports of positive earnings trends gave up 7 points, falling to a negative 22% in June. For a brief moment, it looked like profit trends were turning around, but the positive burst was short-lived. Four percent reported reduced worker compensation and 18% reported raising compensation, yielding a seasonally adjusted net 13% reporting higher worker compensation, down 3 points. A net seasonally adjusted 7% plan to raise compensation in the coming months, down 2 points from May. Clearly the gains in compensation are not being passed on to consumers through higher selling prices.
Ninety-three (93) percent of all owners reported that all their credit needs were met or that they were not interested in borrowing. Twenty-nine percent reported all credit needs met, seven percent reported that not all of their credit needs were satisfied and 51% said they did not want. Only 3% reported that financing was their top business problem. Twenty-nine percent of all owners reported borrowing on a regular basis, down 3 points from May. A net 7% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), down 2 points. The average rate paid on short maturity loans was 6.3%, stuck at much the same level for years.
The Index plunged 3 points in June, that’s a lot. The 10 Index questions lost a total of 30 percentage point in net favorable responses. The impact of the SCOTUS decision on health care will show up in the July survey as it occurred late in the month, ditto for the transportation bill which didn’t make much of a news splash. The health care decision was probably not what most owners expected, so “disappointment” over that will be reflected in the July survey responses. With over 20 new taxes ($800 billion) and most of the regulations yet to be written by HHS, the implications for employee costs remain unclear.
The rumored hiring of thousands of IRS agents to enforce the health care rules will certainly add to employment and Gross Domestic Product (GDP) since our accounting rules simply assume that the value of the output produced by a government worker is equal to their wage. An equal number of workers using their personal savings to produce a new services that did not sell would add nothing to GDP as no sales were registered and no income received. Job creation will be very weak in June and plans for July look even worse, so there will be very little progress on the jobs front in the coming months. No inflation issue on Main Street and there is nothing the Federal Reserve can do to increase employment. Rates are as low as they have ever been and more reductions will not help, but the promise of more action by the Federal Reserve will keep Wall Street busy and appease Congress.
The economy definitely slowed mid-year, not a huge recession threat but slower than earlier in the year. Job growth will be far short of that needed to reduce the unemployment rate unless lots of unemployed leave the labor force. NFIB members didn’t add a lot of jobs and don’t plan to in the coming months. Capital spending and inventory investment also weakened. Expectations for improvements in sales and business conditions faded, so no reason to hire additional workers or buy new inventory. “Political uncertainty” remained historically high as the reason why the current period is not a good time to expand. All in all, this month’s survey was a real economic downer.