Small Business Optimism Drops in June, Ends 2 Months of Increases
Small-business optimism remained in tepid territory in June, as NFIB’s monthly economic Index dropped just under a point (0.9) and landed at 93.5, effectively ending any hope of a revival in confidence among job creators. Six of the ten Index components fell, two rose and two were unchanged. While job creation plans increased slightly in June, expectations for improved business conditions remained negative. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months.
“After two months of incremental but solid gains, the Index gave up in June. This appears par for the course, given that there is no reason for small employers to be more optimistic and lots of things to worry about. Washington remains bogged down in scandals and confidence in government’s ability to deal with our fundamental problems remains low. Economic growth was revised down for the first quarter of the year and the outlook for the second quarter is not looking good. Nothing cheers up a small-business owner more than a customer, and they remain scarce and cautious while consumer spending remains weak and more owners are reporting negative sales trends than positive ones. It certainly doesn't help that the endless stream of delays and capitulations of certain provisions of the healthcare law adds to the uncertainty felt by owners. Until growth returns to the small-business half of the economy, it will be hard to generate meaningful economic growth and job creation.” – NFIB chief economist Bill Dunkelberg
This survey was conducted in June 2013. A sample of 3,938 small business owners/members was drawn
and 662 usable responses were received for a response rate of 17%.
NFIB Chief Economist Bill Dunkelberg
Discusses the Drop in Optimism on CNBC
SBET INDEX SUMMARY
The NFIB Index of Small Business Optimism dropped 0.9 points in June, ending the hope that a revival in sentiment have started. Six of the ten Index components fell, two rose and two were unchanged. The inventory picture deteriorated and was the main contributor to the decline in the Index. More owners were less satisfied with current inventory holdings and plans to increase in the future also deteriorated. So, after two months of solid gains, the Index gave up. No surprise, there was no reason to be more optimistic and lots to worry about.
Eleven (11) percent of the owners (up 2 points) reported adding an average of 3.6 workers per firm over the past few months. Offsetting that, 12% reduced employment (unchanged) an average of 4.3 workers (seasonally adjusted), producing a seasonally adjusted gain of negative 0.09 workers per firm overall. Fifty-three (53) percent of the owners hired or tried to hire in the last three months and 41% reported few or no qualified applicants for open positions. A net 14% reported raising compensation, 2 points below May, which was the highest reading since September 2008. Nineteen (19) percent of all owners reported job openings they could not fill in the current period (unchanged). Twelve (12) percent reported using temporary workers, little changed over the past 10 years. Job creation plans rose 2 points to a net 7% planning to increase total employment, better, but still a weak reading. Overall, the labor indicators held up pretty well, suggesting no improvement of any consequence, just more of the same.
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 gave up 4 points, falling to a negative 8%. Eighteen (18) 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 lost 3 points, falling to 5% of all owners (seasonally adjusted). The pace of inventory reduction continued, with a net negative 7% of all owners reporting growth in inventories (seasonally adjusted), unchanged from May.
For all firms, a net negative 2% (down 3 points) reported stocks too low, a sharp deterioration from May and consistent with weak spending which produces a buildup in stocks. This produced a sharp decline in the net percent of owners planning to add to inventories, falling 4 points to a negative 1% of all firms (seasonally adjusted). Apparently the optimism of the past few months did not come to fruition, producing a sharp reversal in the outlook for inventory spending.
The frequency of reported capital outlays over the past six months fell 1 point to 56%, 9 points below the average spending rate through 2007. Spending overall remains in “replacement mode”, no exuberance in spending, consistent with a dim view of the future for the economy. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 23%. Seven percent characterized the current period as a good time to expand facilities (down 1 point), a very weak number compared to an average value of 16% pre-recession. The net percent of owners expecting better business conditions in 6 months was a net negative 4%, a 1 point improvement. A net 5% of all owners expect improved real sales volumes, down 3 points. Eighteen (18) percent reported “poor sales” as their top business problem, up 2 points, Reported sales trends deteriorated 4 points to a negative 8%. These are not solid numbers and certainly not supportive of a surge in capital spending this year.
Twelve (12) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 4 points), and 19% reported price increases (unchanged). Seasonally adjusted, a net 18% plan price hikes, up 3 points. Overall, the net percent of owners raising prices moved back into the post-1983 range, with modest pressure on prices. There’s no “deflation” on Main Street however and, of course, not much inflationary pressure either.
Earnings & Wages
Reports of positive earnings trends deteriorated 1 point in June to a negative 23%, a poor reading. Four percent reported reduced worker compensation and 19% reported raising compensation, yielding a seasonally adjusted net 14% reporting higher worker compensation (down 2 points). A net seasonally adjusted 6% plan to raise compensation in the coming months, down 3 points. Overall, the compensation picture weakened some, but remained at the higher end of experience in this recovery even if historically weak.
Five percent of the owners reported that all their credit needs were not met, unchanged and the lowest reading since February 2008. Twenty-nine (29) percent reported all credit needs met, and 53% explicitly said they did not want a loan. Only 2% reported that financing was their top business problem compared to 20% citing taxes, 18% citing weak sales and 20% citing regulations and red tape. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, unchanged. A net 6% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), 1 point worse than last month. The average rate paid on short maturity loans was 5.2%, a substantial drop from the average for the past year. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 7%
COMMENTARY BY CHIEF ECONOMIST BILL DUNKELBERG
The revision of first quarter GDP growth to an anemic 1.8% at an annual rate confirms that the economy is growing at a very slow pace, not enough to produce many new jobs. The largest contributor to the negative revision was consumer spending, in particular to spending on services, which account for about 70% of consumer spending. This sector is very labor intensive and a revival of spending there would certainly improve job creation. Housing is getting better but running into some supply side constraints. Nearly half the builders complain that they are having trouble assembling work crews to build new houses while new home sales are pressing against supply. House prices are rising at double digit rates.
In the meantime, uncertainty reigns supreme, who knows what labor will cost or when or what firm size will have to comply with which rules – Health and Human Services is still writing them. The President’s delay for compliance among those with 50 employees or more is a political move, fearing the bad press that might occur prior to elections from the chaos produced by mandatory compliance. It is clear that the government is not prepared to implement this. Really, a group of people, most with little or no private sector experience, decided to restructure 15% of the Gross Domestic Product (GDP). This is what we expected, a rolling disaster – exemptions, special deals, delays, confusion, contradictory regulations. It’s a bad situation in Washington, scandals, no budget deals, no dealing with the big problems, our own government agencies taking advantage of us, Congressional law being suspended by the President, a flood of executive orders, the threat of higher energy costs (the attack on coal). Not a good time to bet on the future by hiring lots of workers with uncertain cost. The NFIB June survey confirms that.
The economy remains “bifurcated”, with the big firms producing most of the GDP growth with little help from small business. That balance is shifting, but unfortunately because larger firms are losing ground, not because small business is growing faster. Housing and energy are helping, and that does involve a lot of small businesses but the rout in housing was so severe that there are now supply constraints developing in new home construction due to lost capacity that cannot be easily reconstituted. Home prices are now increasing at double digit rates. Consumer net worth is allegedly doing well due to stock prices and house prices rising. But the quantity of items held, real wealth (houses, cars, fractions of a company owned), is not increasing that fast, just the prices. Been there, done that.