Small Business Optimism: Slight Bump in August
Few Positive Signs for Future, Little Change Likely Long Term
Despite a disappointing jobs report, the NFIB Small Business Optimism Index gained 1.7 points, rising to 92.9, in August. The Index showed some positive signs; employment indicators for the fourth quarter improved substantially, as did plans for capital outlays and expectations for business conditions. However, few employers continue to think the current period is a good time to expand. The percent of owners viewing the current period as a bad time to expand due to political uncertainty reached a new record high for this business cycle at 22%.
This report is based on the responses of 736 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of August.
- Capital Expenditures: The biggest news about capital expenditures was the increase in owners expecting better business conditions in six months; those expectations gained 6 points, settling at a net negative 2%. Not seasonally adjusted, 14% expect an improvement in business conditions (a 2-point gain), and 24% expect a deterioration (down 1 point). A net 1% of all owners expect improved real sales volumes—up 5 points from July, but still 11 points below February’s reading, which was this year’s high. The frequency of reported capital outlays over the past six months gained 1 point, rising to 55%. Of those making expenditures, 41% reported spending on new equipment (up 3 points), 21% acquired vehicles (up 2 points), and 14% improved or expanded facilities (unchanged). The percent of owners planning capital outlays in the next three to six months gained 3 points, rising to 24%. Still, only 4% characterized the current period as a good time to expand facilities, in contrast with 10% in December 2011 and 28% in December 2004.
- Sales: Sales trends reports confirm that consumer spending is weak and that it slowed mid-year. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 4 points, falling to negative 13%, after a 7-point decline in June. Twenty (20) percent still cite weak sales as their top business problem, historically high, but down from the record 33% reading in December 2010. Seasonally unadjusted, 24% of all owners reported higher sales and 29% reported lower sales. The net percent of owners expecting higher real sales rose 5 points and settling at a net 1% of all owners (seasonally adjusted), ending a five-month decline of 16 percentage points. However, this is a weak reading and unlikely to trigger orders for new inventory or business expansion.
- Job Creation: Job growth in the small-business sector mirrored other national reports: the net change in employment per firm over the past few months (seasonally adjusted) was -.05, making it the third negative month in a row. With job growth essentially “zero,” the only jobs being created are by new firms to serve new consumers due to population growth. Seasonally adjusted, 12% of owners surveyed reported adding an average of 2.7 workers per firm over the past three months, and 10% reduced employment an average of 2.5. The remaining 78% of owners made no net change in employment. Forty-nine (49) percent of the owners hired or tried to hire in the last three months and 37% reported few or no qualified applicants for open positions. The percent of owners reporting hard to fill job openings rose 3 points to 18% of all owners. Not seasonally adjusted, 13% plan to increase employment at their firm (up 2 points), and 9% plan reductions, unchanged. Seasonally adjusted, the net percent of owners planning to create new jobs rose 5 points to 10%.
- Credit Markets: There were no interesting developments in credit markets. Seven (7) percent of the owners reported that all their credit needs were not met (unchanged), 31% reported all credit needs met, and 53% explicitly said they did not want a loan (62% including those who did not answer the question, presumably uninterested in borrowing as well). Financing was the top business problem for only three percent of those surveyed; this compared to 23% who cited taxes, 20% who cited weak sales and 21% who named unreasonable regulations and red tape. Credit is not a problem for most owners and the report suggests that many “qualified” applicants are sitting on the sidelines waiting for economic conditions to improve before borrowing. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point from July. A net 7% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged. Three (3) percent of owners reported higher interest rates on their most recent loan, and five percent reported getting a lower rate.
- Job Creation: July looked a lot like June in terms of job growth—namely, it was negative. The reported net change in employment per firm over the past few months (seasonally adjusted) was -0.04; not as poor as June’s -0.11, but still negative at a time when growth is needed. Readings had been on the rise; from December to May they were zero or positive, suggesting that employment might be turning around. But June, and now July, have ended that possibility. Seasonally adjusted, 10 percent of owners surveyed added an average of 3.0 workers per firm over the past few months, but 11 percent reduced employment an average of 2.3 workers. The remaining 79 percent of owners made no net change in employment. Forty-eight (48) percent of owners hired or tried to hire in the last three months, and 38 percent reported few or no qualified applicants for positions. Overall, there was no meaningful job creation. The percent of owners reporting hard to fill job openings held steady at 15 percent of all owners after falling 5 points in June; May’s reading was the best in 47 months.
- Historical Perspective: When comparing some of the July report’s numbers to those surveyed in 2000, arguably the best economy in history, a stark contrast is drawn, particular after three years of recovery and alleged expansion. A record 70 percent of owners reported capital spending in the prior six months in the January 2000 survey compared to 54 percent in July 2012. The percent of owners with a job opening peaked at 34 percent in 2000 compared to 15 percent today. A record 19 percent planned to create new jobs late in 1999 compared to five percent today. More than a quarter of owners (28 percent) thought it was a good time to expand (December 1999) compared to five percent today.
The Optimism Index gained 1.7 points, rising to 92.9. Although an improvement, the number is still another solid recession reading. There were some positive signs however, the employment indicators for the fourth quarter improved substantially as did plans for capital outlays. However, few think the current period is a good time to expand at 4%. The percent of owners viewing the current period as a BAD time to expand due to political uncertainty reached a new record high for this business cycle at 22%.
The reported net change in employment per firm over the past few months (seasonally adjusted) was -.05, a bit worse than July’s -.04 and the third negative months in a row. Both readings are essentially “zero” for job growth at existing firms. Current job creation is being driven by new firms to serve the millions of new consumers added each year due to population growth. Seasonally adjusted, 12% of the owners reported adding an average of 2.7 workers per firm over the past three months, and 10% reduced employment an average of 2.5. The remaining 78% of owners made no net change in employment. Forty-nine (49) percent of the owners hired or tried to hire in the last three months and 37% reported few or no qualified applicants for open positions.
The percent of owners reporting hard to fill job openings rose 3 points to 18% of all owners, a good sign. Job openings are highly correlated with the unemployment rate, so the August survey offers some hope of an improvement.
Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 4 points, falling to negative 13%. Twenty (20) 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 rose 5 points, rising to a net 1% of all owners (seasonally adjusted), ending a five month decline of 16 percentage points. Still, this is a weak reading and not likely to trigger orders for new inventory or business expansion. The pace of inventory reduction slowed, with a net negative 7% of all owners reporting growth in inventories (seasonally adjusted), a 3-point improvement. With weak sales and sour expectations for any meaningful sales growth, owners continue to meet current demand which is weak. For all firms, a net 0% (unchanged) reported stocks too low, a very positive report as this indicates minimal excess inventory being held. Plans to add to inventories remained weak a net negative 1% of all firms. With expected business conditions and expected real sales still delivering poor readings, it is not surprising that inventory demand remains weak.
The frequency of reported capital outlays over the past six months gained 1 point to 55%. The frequency of reported outlays has gained a few points in recent months but not enough to get out of the rut they have been stuck in since early 2008. Spending activity picked up in several categories but it was not enough to really ramp up overall spending. The percent of owners planning capital outlays in the next 3 to 6 months gained 3 points to 24%. Twenty (20) percent reported “poor sales” as their top business problem, unchanged. A few bright spots as some expectation measures improved, but to levels that are still not typical of a recovery period.
Seasonally adjusted, the net percent of owners raising selling prices was 9%, up 1 point and continuing a longer trend of more frequent reports of higher selling prices. The historic low of -24 was reached in April 2009 when far more owners were cutting prices than increasing. That’s done now. Still, recent readings are consistent with moderate inflation on Main Street. But with rising energy prices, more inflation is likely to appear in the inflation measures. Overall, there is relatively little pressure on selling prices. Eighteen (18) percent plan on raising average prices in the next few months (unchanged), 3% plan reductions (unchanged). Seasonally adjusted, a net 17% plan price hikes, unchanged from July.
Earnings and Wages
Reports of positive earnings trends gave up one point, falling to a negative 28% in August after falling 12 points in June and July. Three percent reported reduced worker compensation and 17% reported raising compensation, yielding a seasonally adjusted net 13% reporting higher worker compensation (up 1 point). A net seasonally adjusted 10% plan to raise compensation in the coming months, up 2 points. Earnings are the major source of capital for small firms to finance growth and expansion. The past and promised increases in regulatory costs and in 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.
There were no interesting developments in credit markets. Seven percent of the owners reported that all their credit needs were not met, unchanged. Thirty-one (31) percent reported all credit needs met, and 53% explicitly said they did not want a loan. Only 3% reported that financing was their top business problem, compared to 23% citing taxes, 20% citing weak sales and 21% naming unreasonable regulations and red tape. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point from July. A net 7% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged.
As expected, there was no real change in owner optimism in August since nothing happened to make owners more confident about the future. Consumers were equally unimpressed according to the University of Michigan/Reuters survey. The survey shows only 12% of consumers think the government is doing a good job and 46% feel government is doing a bad job. And while the top ranked problem (out of 75) in the recently released NFIB Problems and Priorities survey was health insurance costs, the second and fourth ranked problems were “uncertainty about the economy” and “uncertainty about government policy.” This goes a long way toward explaining why spending seems to be in “maintenance mode.” With 50/50 odds in the polls, the president will be determined by the flip of a coin. The policy outcomes depending on who wins appear to be hugely different, and consequently, owners are not betting their hard earned money on the flip of a coin. They are waiting for more certainty about the direction of the economy and policy.
Since 1986 when NFIB started the monthly surveys, the Index has been below 93 for a total of 50 months. Forty-three (43) of them have occurred in the current “recovery” which began in June 2009. That says it all about this recovery. Index readings of a typical recovery are generally above 100, the average historical reading
Always looking for something positive in these dreary numbers, the labor market readings were very solid, with the best hiring plans number in 53 months and a 3 point gain in the job openings indicator. Good for the future, but really no good news about recent months, job creation for existing firms was still basically nil. Job creation in the private sector will depend on large firm hiring, if any, and jobs at new firms that are being created by population growth. Capital spending stirred a point and plans rose 3 points, but still recession type readings. And expectations for real sales gains and for business conditions six months out did improve, but also remain at recession levels.
Some Fed officials still talk about the unwillingness of banks to lend, and for some troubled banks, that might be the case. But these are few in number compared to the number of independent banks available and bankers continue to complain about a dearth of qualified applicants, a position supported by the NFIB surveys. QE3 seems to be creeping toward existence, but opposition is stiff and logical – who hasn’t already responded to record low mortgage rates? What firms didn’t pull the trigger on a project but for a quarter point rate differential? Indeed, if banks are reluctant, it may be due to the Fed’s engineered low rates, too low for ordinary banks to risk locking in for long periods of time. Yes, there might be a third stock market pickup from QE3, but this really isn’t going to get consumers to spend more, it would just be a gift to TBTF banks and traders. And it’s likely to be a very small response. The Fed may be way off its unemployment target (not specified), but QE3 will not have an impact on employment. It will make the Fed’s “unwinding” job more difficult and exposes the Fed to the risk of discovering that “the Emperor wears no clothes.”