Small Business Optimism Up in April
Roller Coaster Continues After March's Decline
After last month’s disappointing drop in small business confidence, April’s Index of Small Business Optimism rose 2.6 points to 92.1, just above the recovery average of 90.7. In April’s report, 4 Index components rose, 2 fell and 4 were unchanged. Yet pessimism abounds within the sector, as still far more of those surveyed expect business conditions to be worse in six months than those who think they will be better.
“Small-business confidence saw an uptick this last month, but it was a ho hum, yawn, at-least-it-didn’t-go-down reading. The sub-par recovery persists for the small business sector,” said NFIB chief economist Bill Dunkelberg. “Economic performance is contradictory—corporate profits are at record levels and the stock market hits new highs, yet GDP growth for the past six months has averaged about 1.5 percent and the unemployment rate is 7.5 percent. Nothing in the NFIB data suggests that the small business half of the economy is expanding other than by an amount driven by population growth and associated new business starts now in excess of terminations. The lack of leadership in Washington and the resulting uncertainty depresses consumers’ and business owners’ willingness to spend and invest, and make bets on the future.” -- NFIB chief economist Bill Dunkelberg
NFIB Research Foundation's Holly Wade
Explains This Month's Optimism Index
This survey was conducted in April 2013. A sample of 10,799 small business owners/members was drawn and 1,873 usable responses were received for a response rate of 18%.
NFIB Chief Economist Bill Dunkelberg
Discuses the Rise in Optimism on CNBC
Job Creation. April was another positive, albeit lackluster month for job creation. Small employers reported increasing employment an average of 0.14 workers per firm in April. This is a bit lower than March’s reading, but still the fifth positive sequential monthly gain. Job creation plans rose 6 points to a net six percent planning to increase total employment.
Hard to Fill Job Openings. Forty-nine (49) percent of owners surveyed hired or tried to hire in the last three months and 38 percent (78 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.
Sales. The net percent of all owners* reporting higher nominal sales in the first quarter of 2013 compared to the fourth quarter of 2012 rose 3 points to a negative four percent, the best reading in 10 months, although there are still more firms reporting declines than those reporting gains. Sales expectations improved 8 points from March to a net four percent.
Earnings and Wages. Earnings trends have been on an upward trajectory but were unchanged in April, holding at a net negative 23 percent. Nineteen percent of small employers reported raising compensation and three percent reported reductions in worker compensation, yielding a net 15 percent reporting higher worker compensation (down 1 point from March). A net nine percent of owners plan to raise compensation in the coming months.
Credit Markets. Thirty-one (31) percent of owners reported that all their credit needs were met; 50 percent explicitly said they did not want a loan (63 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only six percent of owners reported that all their credit needs were not met, down 1 point and only 2 points above the record low.
Capital Outlays. The frequency of reported capital outlays over the past six months fell 1 point to 56 percent, after rising steadily, albeit by small increments, since January. The frequency of expenditures being made remain at the high end of recession-type readings, consistent with the lack of interest in expansion and the dim outlook for business conditions. The percent of owners planning capital outlays in the next three to six months fell 2 points, with a reported 23 percent planning to make future expenditures.
Good Time to Expand. Only four percent of those surveyed characterized the current period as a good time to expand, unchanged from last month and historically a very weak number. Of those who said it was not a good time to expand, 62 percent cited “economic conditions” and 24 percent cited “the political climate.” The net percent of owners expecting better business conditions in six months was a net negative 15 percent, an increase of 13 points over March.
Inventories. The pace of inventory reduction continued, with a net negative six percent of all owners reporting growth in inventories. For all firms, a net negative 1 percent (unchanged) reported stocks too low, historically a good level of satisfaction with inventory stocks.
Plans to increase inventories gained 5 points but rose only to a net zero percent of all firms.
Inflation. Twenty percent of surveyed NFIB owners reported price increases (up 2 points) and 15 percent reported reducing their average selling prices in the past three months (down 2 points). The net percent of owners raising selling prices was three percent, up 4 points. Twenty-one (21) percent of owners plan to raise average prices in the next few months, and three percent plan reductions, both unchanged from March’s report.
SBET INDEX SUMMARY
The Index gained 2.6 points, rising to 92.1. That beats falling, but it is barely above the recovery average of 90.7, making it another very poor reading. Four Index components rose, 2 fell, 6 were unchanged, a lot of “noise”, no clear direction. Owners are very pessimistic about the economy, with a net negative 15% expecting business conditions to be better in 6 months. As bad as that sounds, it was a 13 percentage-point improvement over March.
Forty-nine (49) percent of the owners hired or tried to hire in the last three months and 38% (78% of those trying to hire or hiring) reported few or no qualified applicants for open positions. Compensation has been improving but only gradually and grudgingly. Eighteen percent of all owners reported job openings they could not fill in the current period (unchanged). This measure is highly correlated (inversely) with the unemployment rate, and its failure to improve suggests that the unemployment rate will not improve unless, of course, more unemployed leave the labor force. Thirteen percent reported using temporary workers, little changed over the past 10 years. Job creation plans rose 6 points to a net 6% planning to increase total employment, outcome nice improvement after the 4 point decline in March. Perhaps the “frost” in March didn’t do as much damage to the “green shoots” as some feared. However, owners are still pessimistic and see little reason to hire relative to what would be expected late in the fourth year of an expansion.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the first quarter compared to the fourth quarter of 2012 rose 3 points to a negative 4%. The low for this cycle was a net negative 34% (July 2009) reporting quarter over quarter gains. 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 8 points to 4% of all owners (seasonally adjusted). The pace of inventory reduction continued, with a net negative 6% of all owners reporting growth in inventories (seasonally adjusted). For all firms, a net negative 1% (unchanged) reported stocks too low, historically a good level of satisfaction with inventory stocks. Plans to add to inventories gained 5 points but rose only to a net 0% of all firms (seasonally adjusted).
The frequency of reported capital outlays over the past 6 months fell 1 point to 56%, after rising steadily since January, though by very small amounts. The frequency of expenditures remain at the high end of recession-type readings, consistent with the lack of interest in expansion and the grim (but improving) outlook for business conditions. Overall, the frequency of expenditures improved, but not to levels typical of a normal expansion. The percent of owners planning capital outlays in the next 3 to 6 fell 2 points to 23%. Four percent characterized the current period as a good time to expand facilities and the net percent of owners expecting better business conditions in 6 months was a net negative 15%, 13 points better but still quite negative. With such a dim view of the future, owners are not likely to do a lot of spending on expansion and new equipment. Overall, spending showed some improvement and plans to spend did not fall, but all remained at low levels, not typical of a period of solid economic growth.
Fifteen (15) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 2 points), and 20% reported price increases (up 2 points). Seasonally adjusted, the net percent of owners raising selling prices was 3%, up 4 points. Twenty-one (21) percent plan on raising average prices in the next few months (unchanged), and 3% plan reductions (unchanged). Seasonally adjusted, a net 18% plan price hikes, up 1 point. Overall, there is little evidence of inflationary pressures on Main Street.
PROFITS AND WAGES
Reports of positive earnings trends were unchanged after a 3 point improvement in March, holding at a negative 23%, a poor reading.
Three percent reported reduced worker compensation and 19% reported raising compensation, yielding a seasonally adjusted net 15% reporting higher worker compensation (down 1 point). Overall, this is good news for employees, as compensation gains have been trending up, holding at double digit levels since 2011. A net seasonally adjusted 9% plan to raise compensation in the coming months, unchanged.
Six percent of the owners reported that all their credit needs were not met, down 1 point and only 2 points above the record low. Thirty-one (31) percent reported all credit needs met, and 50% explicitly said they did not want a loan. Only 2% reported that financing was their top business problem compared to 23% citing taxes. Thirty-one (31) percent of all owners reported borrowing on a regular basis. A net 7% reported loans "harder to get" compared to their last attempt (asked of regular borrowers only), up 3 points. The average rate paid on short maturity loans was 5.6%. 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), 2 points worse than in March.
COMMENTARY BY CHIEF ECONOMIST BILL DUNKELBERG
The world is starting to look a bit strange in many respects. Stock markets are at record high levels and corporate profits a record share of GDP (nominal). Yet real GDP barely grew in 2012 Q4 and a sub-par 2.5% in 2013 Q1. Just how we get record profits but hardly produce more output and have prices hardly growing is a bit of a contradiction. The NFIB survey suggests that the small-business sector is not growing. New business starts appear to be slightly ahead of terminations, but both levels are historically low. The Federal Reserve has stopped worrying about inflation. (Historically, inflation was considered the #1 concern of the Fed.) The Vice-chair of the Fed has suggested that inflation will now be a tool used to impact employment rather than a target of policy. Although one can argue that without Quantitative Easing there would have been even less job growth, it does not appear that the massive QEs have had much of an impact on employment growth. The Fed is providing a trillion dollars’ worth of finance to the government, money that it does not have to tax from us or borrow from the private sector or the rest of the world. Debt is piling up and future servicing costs will be formidable. Meantime, interest income to consumers has declined half a trillion dollars over the past few years, that’s a huge loss of income and certainly impairs spending. Washington is always ready to help debtors but not savers.
Small-business owners remain quite pessimistic about the future and this has depressed spending and hiring. Capital spending is low which will eventually impact worker productivity as will the conversion of full-time workers to part-time workers induced by the health care law. Managing two part-time workers to do the work of one full-time worker too expensive to hire will add to inefficiency. Although better than the past few months, the percent expecting business conditions to be worse in 6 months exceed the percent expecting improvement by 15 percentage points. More now expect real sales to be higher than lower by 4 percentage points, better than the past 6 months in which the margin was negative, but very thin. Only 4% think it’s a good time to expand. In "normal" times, that would be a double digit figure. Owners are preparing for higher taxes and the full implementation of the health care law, both large negatives. Consumers agree, less than 10% think government is doing a “good” job, 47% firmly believe it is “bad”. More customers would trigger more hiring and inventory investment and capital spending, but consumers seem to be unwilling to cooperate. But, only 23% plan to make capital expenditures and as many firms plan to cut inventories as plan to add to them. This does not stimulate much growth.