Hiring Plans Plunge: Small Business Optimism Drops 0.1
Expectations for the Future Remain Low
September was another month of low expectations and pessimism for the small-business community, with the NFIB Small Business Optimism Index losing 0.1 points and falling to 92.8. The recession-level reading was pulled down by a deterioration in labor market indicators, with job creation plans plunging 6 points, job openings falling one point and more firms reporting decreases in employment than those reporting increases in employment. Since the commencement of NFIB’s monthly surveys in 1986, the Index has been below 93.0 a total of 56 times; 32 of which have occurred since the recovery began in June 2009.
This report is based on the responses of 691 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of September.
NFIB President and CEO Discusses This Month's Survey
- Capital Expenditures: Small-business owners are still in “maintenance mode,” with the frequency of reported capital outlays over the past six months falling 4 points to 51 percent. Of those making expenditures, 34 percent reported spending on new equipment (down 7 points from the previous month), 16 percent acquired vehicles (down 5 points), and 14 percent improved or expanded facilities (unchanged). Four (4) percent of owners acquired new buildings or land for expansion (down 2 points) and 12 percent spent money for new fixtures and furniture (unchanged). Overall, there was a substantial reduction in capital spending activity. The percent of owners planning capital outlays in the next three to six months fell 3 points to 21 percent. While the number of owners who characterized the current period as a good time to expand facilities went up 3 points (seasonally adjusted) to seven percent, this is only half of the 14 percent of owners who said the same in September 2007. The net percent of owners expecting better business conditions in six months rose 4 points to two percent after posting a 6 point improvement last month, albeit still registering a pessimistic collective view. Not seasonally adjusted, 15 percent expect an improvement in business conditions (up 1 point), and 20 percent expect deterioration (down 4 points). A net one percent of all owners expect improved real sales volumes.
- Sales: Weak sales continue to be an albatross for the small-business community. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged at a negative 13 percent, cementing the 17 point decline since April and affirming weak GDP growth for the second quarter. Twenty-one (21) percent still cite weak sales as their top business problem—historically high, but down from the record 34 percent reached in March 2010. Seasonally unadjusted, 23 percent of all owners reported higher sales (last three months compared to prior three months, down 1 point) and 30 percent reported lower sales (up 1 point). Consumer spending remains weak and high energy costs continue to “tax” consumer disposable income. The net percent of owners expecting higher real sales was unchanged at one percent of all owners (seasonally adjusted), down 11 points from the year high of net 12 percent in February. The weak reading is unlikely to trigger orders for new inventory or business expansion. Not seasonally adjusted, 24 percent expect improvement over the next three months (down 4 points) and 31 percent expect declines (up 3 points).
- Job Creation: Job creation plans showed that small-business owners created fewer jobs in September than in the two previous months. Not seasonally adjusted, 10 percent plan to increase employment at their firm (down 3 points), and 11 percent plan reductions (up 2 points). Seasonally adjusted, the net percent of owners planning to create new jobs fell 6 points to four percent, a historically weak reading, especially in a recovery. Essentially, hiring is keeping up with population growth, but not exceeding it. Seasonally adjusted, 10 percent of the owners reported adding an average of 2.2 workers per firm over the past few months, and 13 percent reduced employment an average of 3 workers. The remaining 77 percent of owners made no net change in employment. Fifty-one (51) percent of the owners hired or tried to hire in the last three months and 41 percent (80 percent 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 17 percent of all owners. The only region of the country that saw any positive job growth was the West North Central states, largely because of energy production.
The Optimism Index lost 0.1 points, falling to 92.8. Since monthly surveys were started in 1986, the Index has been below 93.0 fifty-six times, and 32 of those low readings have occurred since the recovery began in June 2009. News on the economy didn’t really change and neither did business owner’s views of the future for the economy – it’s as uncertain as it has been all year. Views about the current period as a “good time to expand” did gain 3 points, and the number of owners expecting business conditions to be better in six months gained 4 points over the pessimists, landing at a net 2%. However, these are hardly strong readings, even if improved.
Consumer spending has barely advanced this year, and consequently so has job creation. Employment is still 4 million lower than it was in the first quarter of 2008 (first quarter). The population grows about 1% annually. A few more jobs are needed to take care of that, and that seems to be about all we are getting. The percent of owners reporting hard to fill job openings fell 1 point to 17% of all owners, no help for a lower unemployment rate. Seasonally adjusted, the net percent of owners planning to create new jobs fell 6 points to 4%, a historically weak reading, especially in a recovery. Owners remained pessimistic about the future in September and consequently hiring plans remain weak. Reported job creation for the past few months was negative. More workers let go than hired, signaling a weak BLS jobs report for September, around 100,000 new jobs overall.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was unchanged at a negative 13%. The five year high of a net 4% was reached in April. The low for this cycle was a net negative 34%, last reached in July 2009. Twenty-one (21) 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 was unchanged at 1% of all owners (seasonally adjusted), down 11 points from the year high of net 12% in February. This is a weak reading, not likely to trigger orders for new inventory or business expansion. The pace of inventory reduction slowed, with a net negative 8% of all owners reporting growth in inventories (seasonally adjusted), a 1 point deterioration. For all firms, a net negative 1% (down 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 than plan to add new stocks.
(21) percent reported “poor sales” as their top business problem, up 1 point. Overall, the survey shows no improvements in the capital spending indicators. The percent of owners planning capital outlays in the next 3 to 6 months fell 3 points to 21%. Seven percent characterized the current period as a good time to expand facilities (up 3 points, seasonally adjusted) compared to 14% in September 2007. The net percent of owners expecting better business conditions in 6 months rose 4 points to 2% after posting a 6 point improvement last month. But this is still a collectively pessimistic view.
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.
EARNINGS 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.
There were no interesting developments in credit markets in September. The average rate paid on short maturity loans was 5.7%, stuck at much the same level for years even though the one year Treasury rate is barely above 0%. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 1 point from August. Eight percent of owners reported that all their credit needs were not met, also up 1 point. Thirty-two (32) 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 21 each percent citing taxes, weak sales and unreasonable regulations and red tape.
COMMENTARY BY BILL DUNKELBERG
Uncertainty has cast a cloud over the future for small business owners, making it difficult to make commitments to new spending and hiring. In a recently released NFIB Problems and Priorities survey, owners rated the severity of 75 business issues. Uncertainty about the economy ranked second while uncertainty about government policy ranked fourth. For perspective, securing long term funding was 56th and finding qualified workers 32nd. With a 50/50 election, according to the polls, and very different sets of policies that might be put in place, owners are unwilling to put their own capital on the line until the future path of the economy and economic policy becomes clearer.
MOST IMPORTANT PROBLEM: 2012
1. Rising Cost of Health Care Insurance
2. Uncertainty over Economic Conditions
3. Energy Costs
4. Uncertainty over Government Actions
5. Unreasonable Government Regulations
6. Federal Taxes on Business Income
7. Tax Complexity
8. Frequent Changes in Federal Tax Laws and Rules
9. Property Taxes
10. State Taxes on Business Income
25. Finding Out About Regulatory Requirements
31. Competition from Large Businesses
32. Finding Qualified Employees
56. Obtaining Long-Term Business Loans
Obviously, taxes and regulations are high on the list of concerns of business owners and these are issues that politicians will be addressing as the election approaches. Politicians have little understanding of the costs their actions impose on the private sector. “Frequent changes in the tax code” should not consistently rank in the top 15 problems that owners face.
Labor market indicators remained weak, providing little hope for a recovery in employment. Capital spending plans, inventory investment plans, hiring plans were all soft, so prospects for more rapid growth in GDP are dim unless the election outcome produces euphoria (and more spending) among a significant segment of consumers. Economic activity appears to be driven mostly by population growth; there isn’t much beyond the 1% in growth this produces.