Small Business Optimism Ticks Up Slightly
But Uncertainty About Future Business Conditions Reaches Record High
The NFIB Small Business Optimism Index rose 0.3 in October to 93.1; the slight uptick in the reading did not seem to indicate a dramatic shift in owner sentiment over the course of the month. The survey, conducted before the presidential election, found that the percent of owners uncertain about whether business conditions will be better or worse in six months, was at a record high of 23%. This eclipsed the pre-recession record of 15% reached during the Carter Administration. NFIB’s forward labor market indicators weakened last month, and owner views of the future do not foresee much improvement in economic growth.
“While four of ten survey components rose, the Index still remains in solidly pessimistic—and recessionary territory,” said NFIB chief economist William Dunkelberg.
This survey was conducted in October 2012. A sample of 10,799 small-business owners/members was drawn. Two thousand and twenty-nine (2,029) usable responses were received – a response rate of 19%.
“In the 40 months since the alleged ‘recovery’ started in July 2009, the Index has never exceeded a reading of 95; the pre-recession average for the Index is 100. The election is over and Washington looks much like it did on November 5th. The fear of stalemate among the small-business community is palpable, as the looming fiscal cliff and the threat of higher costs and more taxes are very real possibilities come January. Until then, not knowing the direction of the economy will always have a dampening impact on spending and hiring.” One indicator that rose slightly in October is the frequency of reported capital outlays in the past six months, increasing 3 points to 54%. Similarly, the percent of owners planning capital outlays in the next three to six months rose one point to 22%. These positive changes, however, are unlikely a sign that capital spending might return to levels more consistent with past recovery periods, as only 7% characterized the current period as a good time to expand facilities. The net percent of owners expecting better business conditions in six months was also unchanged at a net 2%.
- Sales: Weak sales is still the reported No. 1 business problem for 22% of owners surveyed. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months is negative 15%, 2 points worse than September, confirming the weak growth in non-durable consumer spending in the third quarter. The five-year high of a net four percent was reached in April. Seasonally unadjusted, 18% of all owners reported higher sales (last three months compared to prior three months), down 5 points and 29% reported lower sales, down 1 point. Consumer spending remains weak and high energy costs diminish consumer disposable income. The net percent of owners expecting higher real sales rose 2 points to 3% of all owners (seasonally adjusted), down 9 points from the year high of net 12% in February. Not seasonally adjusted, 25% expect improvement over the next three months (up 1 point) and 34% expect declines (up 3 points).
- Job Creation: October was another weak job creation month, though better than September due primarily to a reduction in terminations which will raise the net jobs number. According to the October survey, owners stopped releasing workers; the average change in employment per firm rose to just 0.02 workers—essentially zero. While this development ends a four-month run of employment reductions (September’s number was a seasonally adjusted -0.23), national employment is still 4 million lower than it was in 2008 (first quarter). Seasonally adjusted, 11% of the owners reported adding an average of 2.7 workers per firm over the past few months, and 10% reduced employment an average of 2.9 workers. The remaining 79% of owners made no net change in employment. Forty-eight (48) percent of the owners hired or tried to hire in the last three months and 38% reported few or no qualified applicants for open positions. The percent of owners reporting hard to fill job openings fell one point to 16% of all owners, the second monthly decline in a row. Twelve (12) percent have openings for skilled workers, 2% for unskilled and 3% for both. Job creation plans remained weak, with a net 4% planning to increase employment, unchanged from September and 6 points below the August reading. Not seasonally adjusted, 10% plan to increase employment at their firm (unchanged), but 12% plan reductions (up 1 point).
- Credit Markets: Access to credit continues to be low of the list of small-business owner concerns. Twenty-eight (28) percent reported all credit needs met, and 52% explicitly said they did not want a loan (64% including those who did not answer the question, presumably uninterested in borrowing as well). Eight percent of those surveyed reported that all their credit needs were not met, and only 3% reported that financing was their top business problem. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point from September. A net seven percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), which is up 1 point from September. Three percent of owners reported higher interest rates on their most recent loan, while another 3% reported getting a lower rate. 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), down 1 point from September.
The Optimism Index gained 0.3 points, increasing to 93.1. In the 40months since the “recovery” started in July 2009, the Index has been higher only eight times. And, it has never exceeded 95. The pre-recession average for the Index is 100. There is nothing of note in the composition of last month’s Index improvement. All the changes were small and have varied randomly for the past few years, keeping the Index in a narrow “recession” level range, vacillating between 88 – 94 for much of the last three years. Of note is the percentage of owners who are uncertain as to whether business conditions will be better or worse six months from now. It hit a survey record high, beating the previous record reached in the Carter Administration by 8 percentage points. Not knowing the direction of the economy will always have a dampening impact on spending and hiring.
Owners slowed the reduction of workers in the October survey, raising the average change in employment per firm to 0.02 workers, up from a seasonally adjusted -0.23 in September. The improvement ended a run of 4 months of employment reductions. Seasonally adjusted, 11% of the owners reported adding an average of 2.7 workers per firm over the past few months, and 10% reduced employment an average of 2.9 workers. The remaining 79% of owners made no net change in employment. The percent of owners reporting hard to fill job openings fell 1 point to 16% of all owners, the second monthly decline in a row. Job creation plans remained weak, with a net 4% planning to increase employment, unchanged from September and 6 points below the August reading.
The frequency of reported capital outlays over the past 6 months rose 3 points to 54%, still in “maintenance mode.” Of those making expenditures, 37% reported spending on new equipment (up 3 points), 19% acquired vehicles (up 3 points), and 14% improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (up 2 points) and 12% spent money for new fixtures and furniture (unchanged). Overall, there was no sign that capital spending might be returning to levels more consistent with past recovery periods. The percent of owners planning capital outlays in the next 3 to 6 months rose one point to 22%. Seven percent characterized the current period as a good time to expand facilities (unchanged) compared to 14% in September 2007. The net percent of owners expecting better business conditions in 6 months was also unchanged at a net 2%, hardly an optimistic outlook. Overall, the survey shows no improvements in the capital spending indicators.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was negative 15%, 2 points worse than in September, confirming the weak growth in non-durable consumer spending in the third quarter. Twenty-two (22) 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 rose 2 points to 3% of all owners (seasonally adjusted). The reading is down 9 points from the year high of net 12% reached in February. The pace of inventory reduction continued, with a net negative 8% of all owners reporting growth in inventories (seasonally adjusted), unchanged from September. For all firms, a net 0% (up 1 point) reported stocks too low, still a very positive report as this indicates minimal excess inventory in the hands of owners. Plans to add to inventories remained weak at a net negative 1% of all firms (seasonally adjusted), more plan to reduce stocks than plan to increase them.
Seasonally adjusted, the net percent of owners raising selling prices was 6%, down 3 points. The dramatic price cutting that characterized the recession is over and price pressures have returned to normal ranges in the NFIB survey. Recent readings are consistent with moderate inflation on Main Street, but rising energy prices will produce more headline inflation. Seasonally adjusted, a net 19% plan price hikes, up 2 points.
PROFITS AND WAGES
Reports of positive earnings trends improved one point, rising to a net negative 27% in September. Earnings are the major source of capital for small firms to finance growth and expansion, and repay debts incurred to invest in their firms. The past and promised increases in regulatory costs and taxes will diminish the available financial support for growth, as well as reduce the expected profitability associated with new investments in the business or new hires. Two percent reported reduced worker compensation and 16% reported raising compensation, yielding a seasonally adjusted net 14% reporting higher worker compensation, up 1 point. A net seasonally adjusted 10% plan to raise compensation in the coming months, unchanged from August.
Eight percent of the owners reported that all their credit needs were not met and only 3% reported that financing was their top business problem, compared to 20% citing taxes, 22% citing weak sales and 19% citing unreasonable regulations and red tape. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8%, 1 point worse than in September. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point from September. A net 7% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), 1 point higher than September. The average rate paid on short maturity loans was 5.8%,
COMMENTARY BY BILL DUNKELBERG
The labor markets regained their statistical footing. After California “went missing” in the claims reports, jobless claims rose to nearly 392,000 the week after and fell to 369,000 after that. These are numbers more consistent with the current level of economic activity. Five million workers are still “long term unemployed,” 40% of the total pool of unemployed. The average duration of unemployment is about 40 weeks (median is 20), historically very high. The labor force participation rate is under 64%, below the 66% pre-recession level. This explains a large share of the decline in the unemployment rate; people who give up looking for a job and leave the labor force are not “unemployed.” The 893,000 new jobs in the Household Survey (largely part-time) were inconsistent with private GDP growth of 1.3%. Historically, such a large number occurred during strong growth, as in June 1993 when GDP grew at an 8% annual rate.
Uncertainty about the election has been a major impediment to spending because the Presidential candidates offered very disparate policies for the economy. That is now resolved. We invested $2 billion and lots of time in “change” but the day after the election looked pretty much like the day before: same President, same Senate and House, more or less. Certainly the major players on the stage are the same, the question is has the script changed? If the Republicans were looking for a new cast and an opportunity re-write the past, that hope is gone. If the President was looking for a re-take of the House, that cast will be the same as well. But, the play must go on and it will. Only a re-write of the script by both casts will produce progress. But writers haven’t talked for months....
Investors who had bet on a change expressed their discontent with a major sell-off in the stock market. This of course creates buying opportunities for those who were hoping for no change and got it. There will be many autopsies of the now deceased election results, and many explanations of the outcome. For small business owners, all the uncertainties remain although the odds of resolving them in one direction or another will have changed for many. But overall, it is now unlikely that anything will happen in November to make them more optimistic about the future, as has been the case for many months, even years now. Let’s see what the New Year and the new Congress brings, as it is likely that current Congress will simply “kick the can” at least until January. One thing for sure, the economic pressure to do something will be large indeed. The November survey will reveal a combination of the effects of the election and hurricane Sandy. Regional differences in the performance measures should be large. Stay tuned.