Small Business Confidence in a Lull
The Small Business Optimism Index rose just 0.1 points in January, settling at 93.9. While the increase marks five consecutive months of improvement, the readings from January and February 2011 were actually higher -- indicating no net gain for the calendar year. Historically, optimism remains at recession levels. While small business owners appeared less pessimistic about the outlook for business conditions and real sales growth, that optimism did not materialize in hiring or increased inventories plans.
“The most positive statement that can be made about January’s reading is that the Index did not go down; a change of 0.1 points is essentially no change and it is hardly indicative of a surge in economic activity,” said NFIB Chief Economist Bill Dunkelberg. “Nothing happened last month that would significantly improve the small business outlook; Washington is at a stalemate. The Index remains below its level a year ago of 94.1 which means that no progress was made in 2011. Congress has failed to pass a budget for over 1,000 days, and without discipline on spending or any budgetary priorities, there is no path to fiscal sanity in Washington. U.S. debt is now larger than our GDP, and headed in the wrong direction. This does not make for a comforting future, a fact reflected by low consumer and small-business owner optimism.”
A retrospective upon the last 12 months of the Index suggests that for small-business owners, 2011 was a “flat” year. While the Index is edging in a positive direction, January 2012’s survey indicates that the economy will continue to crawl along at a slow and weak pace.
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Highlights of January's Optimism Index
- NFIB reports of job growth improved (0.15) from December, but only to net zero (0) new workers per firm. The Bureau of Labor Statistics (BLS) report issued on February 3rd showed relatively strong job creation for January; NFIB’s data suggest that there will be some downward revision in BLS numbers, especially in light of the adjustments in the Household Survey that suggested a huge number of adults left the labor force. Seasonally adjusted, 11 percent of owners added an average of three workers per firm over the past few months, while 11 percent reduced employment an average of 2.9 workers per firm. The remaining 78 percent of owners made no net change in employment. Owners reporting reductions in employment remained relatively low, suggesting that firms are through cyclically adjusting their employment. Reports of workforce reductions are at their lowest level since October 2007. Forty-one percent of owners hired or tried to hire in the past three months, but 31 percent reported few or no qualified applicants for the position(s). The increase in the percent of owners with hard to fill job openings indicates that job markets are tightening somewhere, and correctly anticipated a decline in the unemployment rate.
- The frequency of firms that reported making capital expenditures over the past six months lost one point, declining to 55 percent, but still retaining the solid gain posted in December. The record low of 44 percent was reached most recently in August 2010. Of those making expenditures, 38 percent reported spending on new equipment (down 4 points), 20 percent acquired vehicles (unchanged), and 13 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (up 1 point) and 11 percent spent money for new fixtures and furniture (down 2 points). While the spending picture has improved, it still falls short of “normal”. The percent of owners planning capital outlays in the next three to six months held at 24 percent; this is the highest reading in years, but still 10 points lower than those typically seen in an expanding economy.
- The net percent of owners expecting better business conditions in six months was a negative 3 percent, 5 points better than December but still 13 percentage points below last year’s reading. Not seasonally adjusted, 18 percent expect deterioration (down 4 points), and 22 percent expect improvement (up 7 points). A net 10 percent of all owners expect improved real sales volumes, up 1 point and the strongest reading since the beginning of the year. Twenty-two percent report “poor sales” as their top business problem, down 1 point, but still the top business problem reported.
- Increasing 3 points over December, a net negative 7 percent of all owners (seasonally adjusted) reported growth in their inventories. January marks 56 consecutive months during which reported inventory reductions have outnumbered reported increases. Unadjusted, 11 percent reported growth in inventory stocks (unchanged) and 22 percent reported inventory reductions (up 1 point). More owners reported weaker sales quarter on quarter than improvements, so demand can be met by reducing inventories on hand. Overall, it appears that small-business owners have reduced inventories to acceptable levels given the outlook for sales growth. Without improved sales, there is little motivation to order new inventory stocks. Plans to add to inventories dropped 5 points, arriving at a disappointing net negative 3 percent of all firms (seasonally adjusted). This drop is notable because December’s reading was the best in 18 months.
- Eighteen percent of the NFIB owners reported raising their average selling prices in the past three months (up 1 point), and 17 percent reported price reductions (down 1 point). Seasonally adjusted, the net percent raising selling prices was -1 percent, down a point from December. The frequency of price increases was highly concentrated in the Wholesale (a net 14 percent raised prices) and Retail (net 4 percent raised). Those cutting prices exceeded those raising prices by 14 percentage points in Construction and Agriculture, largely a result of seasonal impact. Twenty-three (23) percent of owners plan to raise average prices in the next few months, while 3 percent plan reductions. Seasonally adjusted, a net 17 percent plan price hikes up 3 points. With some evidence that spending has picked up, some of these price hikes might stick.
This month’s report is based on the responses of 2,155 randomly sampled small businesses in NFIB’s membership, surveyed throughout the month of January.
SUMMARY
Optimism Index
The Index of Small Business Optimism gained 0.1 points, to 93.9, so basically unchanged from December. Index readings from January and February 2011 were higher, so we are still below where we were a year ago even though the Index has risen five months in a row. Except for January and February of 2011, the current Index is the highest reading since December 2007 when the economy peaked. But, in spite of the progress made in the past few months, the fact is that it still remains at recession-level readings.
Labor Markets
NFIB reports of job growth improved from December, but only to a net increase in workers per firm of “0”, up 0.15. Not much job creation in that number. Seasonally adjusted, 11 percent of the owners added an average of 3.0 workers per firm over the past few months, while 11 percent reduced employment an average of 2.9 workers per firm. Forty-one percent of owners hired or tried to hire in the past 3 months, but 31 percent reported few or no qualified applicants for the position(s) – three of four applicants were not qualified. Eighteen (18) percent (seasonally adjusted) reported hard to fill job openings, up 3 points and the highest reading since June 2008, just before economic growth crashed. Over the next three months, 13 percent plan to increase employment (up 4 points), and 7 percent plan to reduce their workforce (down 1 point), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs, a 1 point decline from December. There is no surge in hiring indicated by these numbers, leaving employment gains far short of the level needed to significantly reduce unemployment and under-employment.
Capital Spending
The frequency of reported capital outlays over the past 6 months lost one point, declining to 55 percent, retaining the solid gain posted in December. Overall, the spending picture has improved, but still far short of “normal”.
The percent of owners planning capital outlays in the next 3 to 6 months held at 24 percent, the highest reading in years. These are better readings, but still 10 points lower than typically seen in an expanding economy. Money is available, but most owners are not interested in a loan to finance the purchase of equipment they don’t need. Nine percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point and one of the best readings since the start of the financial crisis. The net percent of owners expecting better business conditions in 6 months was a negative 3 percent, 5 points better than December but still 13 percentage points below last year’s reading. Hopefully, this improvement in the economic outlook will translate into more spending and hiring.
Inventories and Sales
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months gained 1 point, rising to a net negative 6 percent, still more firms with sales trending down than up. Even with the improvements in retail sales in recent months, 22 percent of the owners still reported “weak sales” as their top business problem. The net percent of owners expecting higher real sales gained 1 point to a net 10 percent of all owners (seasonally adjusted) after posting an 8 point improvement in November and 5 points in December. Solid moves, but leaving the indicators still in recession territory. A net negative 7 percent of all owners reported growth in inventories (seasonally adjusted), 3 points better than December. For all firms, a net 1 percent (up 1 point) reported
stocks too low, a very “satisfied” reading based on survey history. Overall, it appears that small business owners have reduced inventories to acceptable levels given the outlook for sales growth. Without improved sales, there is little motivation to order new inventory stocks. Plans to add to inventories lost 5 points to a net negative 3 percent of all firms (seasonally adjusted), falling from the December reading which was the best reading in 18 months.
Inflation
Eighteen (18) percent of the NFIB owners reported raising their average selling prices in the past 3 months (up 1 point), and 17 percent reported price reductions (down 1 point). Seasonally adjusted, the net percent raising selling prices was -1 percent, down a point from December. Twenty-three (23) percent plan on raising average prices in the next few months, 3 percent plan reductions. Seasonally adjusted, a net 17 percent plan price hikes up 3 points. With some evidence that spending has picked up, some of these price hikes might stick.
Profits and Wages
Reports of positive earnings trends were 2 points worse in January at a net negative 24 percent of all owners taking back part of the 6 point improvement registered in December. Unable to raise prices and with weak sales growth, small businesses are unable to restore profitability. Profits are the source of capital to grow small firms (they can’t sell shares to shareholders to provide new capital), so weak profits are hindering improved capital spending in this sector of the economy. Four percent reported reduced worker compensation and 14 percent reported raising compensation, yielding a seasonally adjusted net 12 percent reporting higher worker compensation, the highest reading since November 2008.
Credit Markets
Four percent reported financing as their #1 business problem. Nine percent reported that not all of their credit needs were satisfied (the record low is 4 percent, reached in 2000). Thirty (30) percent of all owners reported
borrowing on a regular basis, down 1 point and only 2 points above the record low. A net 11 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 1 point.
COMMENTARY
From the perspective of NFIB owners, 2011 was a flat year at best. The Index of Small Business Optimism stood at 94.1 in January 2011 and 93.9 in January 2012, after dipping as low as 88.1 in August of 2011. The best that can be said is that the year ended on an upbeat note, with 5 months of improvement if January’s 0.1 gain is regarded as an improvement. For perspective, the Index stood at 94.6 in December 2007 as the economy slipped into recession.
The prospects for resolving the major uncertainties facing small business owners in 2012 are low. Government spending surges ahead, undisciplined without a federal budget for over 1,000 days which is no way to run the largest "business" in the world, USA, Inc. Tax issues remain unresolved and spending issues unaddressed. In the meantime, the President moves ahead, using executive orders to implement policies that many believe are the responsibility of Congress.
The Federal Reserve Bank officially announced an inflation target, setting a goal for one of its twin policy mandates. The inflation rate target will be 2 percent as measured by the Personal Consumption Deflator. It was a surprise to many that it did not choose the “core” PCE inflation rate which excludes volatile food and energy prices. Headline inflation rates are more volatile, leaving a question as to how much "volatility" in policy might be required to deal with energy price swings. Since no other details were made available, many important questions go unanswered. It is important to know over what period of time the Federal Reserve must hit the 2 percent target, what the "penalty" is for failing to do so, and how policy directed at “price stability” will be impacted by an unspecified unemployment rate objective. We are a long way from what most observers would accept as a reasonable level of the unemployment rate, so how far above the 2 percent inflation target will the Federal Reserve go in an attempt to lower unemployment. If they specify a time period over which the 2 percent inflation target is to be met, but as we near the end of that period, inflation is well above the target, must the Federal Reserve “hammer” the economy to meet it? Currently, the PCE inflation rate is above the 2 percent target, so tightening would be the order of the day – except that the unemployment rate is 8.3 percent, well above the secret unemployment rate target, which begs for more monetary expansion, a QE3. Go figure, that’s what everyone is doing.
So, overall, the January NFIB survey indicates that the economy will continue to crawl along at a sub-par pace. There appears to be no pressure on prices at the core level, energy is the wild card. Wage growth is picking up, but slowly. The net increase in jobs of “0” is not promising for job creation nor was the decline in the net percent of owners planning job creation. The increase in the percent of owners with hard to fill job openings does indicate that job markets are tightening somewhere, and correctly anticipated a decline in the unemployment rate. There was no exuberance in capital spending, but the improved levels reached at the end of 2011 held up. So, “muddle through” seems to best characterize the first half of the year. Too much uncertainty with little prospect of much resolution.