Small Business Economic Trends – June 2016

 

Embargoed July 12, 6am

 (Based on 735 respondents to the June survey of a random sample of

NFIB’s member firms, surveyed through 6/30/16)

 

 

Chart data points are first month in each quarter, interim monthly survey results (smaller samples) are shown in blue.

 

Overview: The small business optimism index rose 0.7 points in June to 94.5.

 

The Index of Small Business Optimism increased 0.7 points to 94.5, still well below the 40 year average of 98, but the third monthly gain in a row, although the gains are very small.  Four of the 10 Index components posted a gain, three declined and three were unchanged.  The outlook for business conditions six months out continued to improve, although more owners still expect conditions to be worse than expect improvement.  The percent of owners with job openings revisited the high readings for the expansion, as did capital spending plans, but they both remain historically weak for a growth period.  NFIB owners reported capital spending less frequently in June than in May. Weak capital spending remains one of the main causes of slow GDP growth.

 

Only 8 percent (seasonally adjusted) view the current period as favorable for business expansion, the average for this recovery but well below the 17 percent average for 2000-2007.  The political climate is the second most frequently cited reason that the current period is not a good time to expand, after weak sales and economic growth.  This presidential election cycle has not been supportive of future business investments, too much uncertainty. 

 

First quarter GDP growth was revised up again, to a sluggish 1.1 percent.  Second quarter growth will likely be better, in the low 2 percent range.  Although, a number of credible analysts have a 3 handle on their forecast, which would make Q2 the third quarter one of the few in the expansion to reach 3 percent.  The Federal Reserve has not yet hit its goals of “maximum employment” and 2 percent inflation (although it is close) and is very concerned about the impact of global developments on the U.S. economy.  This makes a second rate hike this year unlikely unless the U.S. and European economies perform better in the second half of 2016.  The Federal Reserve still appears to be more focused on financial markets than the real economy.  Small business owners appear to be on the same track they have followed for the past few years – maintenance mode, but not much growth.  This will keep the economy moving forward, but not at an impressive pace.

 

 

SMALL BUSINESS OPTIMISM INDEX AND TEN COMPONENTS

 

                                                                  JUNE        Change             Share of 

                                                                                                             Change 

CREATE NEW JOBS(net)

 

    11%

      -1

       *%

MAKE CAPITAL OUTLAYS

 

    26%

     +3

       *%

INCREASE INVENTORIES(net)

 

     -3%

      -2

       *%

JOB OPENINGS HARD TO FILL

 

    29%

     +2

       *%

INVENTORIES TOO LOW(net)

 

     -4%

       0

       *%

GOOD TIME TO EXPAND

 

      8%

      -1

       *%

EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS(net)

 

     -9%

     +4

       *%

EXPECT HIGHER REAL SALES(net)

 

      2%

      +1

       *%

EXPECT EASIER CREDIT CONDITIONS (net)

 

     -6%

 

        0

       *%

EARNINGS TRENDS (net) POSITIVE

 

   -20%

        0

       *%

 

 

 

 

 

TOTAL CHANGE

INDEX OF SMALL BUSINESS OPTIMISM  (1986 = 100)

 

 

  94.5

  

       +6

    +0.7

      100%

 

[Column 1 is the current reading, column 2 the change from the prior month, column 3 the percent of the total change in the Index accounted for by each component; “*” means the percent <0.5% or not a meaningful calculation.  Index is based to the average value in 1986, components are not.  The term “net” means that the percent of owners giving an unfavorable answer has been subtracted from the percent of owners giving a positive or favorable response.  For some questions, there is no “unfavorable” response category]

 

LABOR MARKETS

 

Reported job creation weakened in June, with the seasonally adjusted average employment change per firm posting a decline of -0.17 workers per firm.  Eleven percent (unchanged from May) reported increasing employment an average of 3.4 workers per firm while 13 percent (up 2 points) reported reducing employment an average of 3.2 workers per firm (seasonally adjusted). 

 

Fifty-six percent reported hiring or trying to hire (unchanged), but 48 percent (86 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.  Fifteen percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem and the highest reading in this expansion (3 percent was the low).   The issue ranks third out of nine possible issues listed.

 

 

Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 2 points, the highest reading in this expansion.  Twelve percent reported using temporary workers, down 3 points, consistent with the overall decline in employment and hiring.

 

 

A seasonally adjusted net 11 percent plan to create new jobs, down 1 point from May.  Not seasonally adjusted, 18 percent plan to increase employment at their firm (down 4 points), and 6 percent plan reductions (up 1 point).  Owners in the West South Central and West North Central states (the strip from Texas to North Dakota) were the least inclined to create new jobs.  Plans to create new jobs were strongest in construction, followed by financial services, agriculture, and manufacturing.

 

 

 

 

 

CAPITAL SPENDING

 

Fifty-seven percent reported capital outlays, down 1 point from May.  Of those making expenditures, 41 percent reported spending on new equipment (up 2 points), 23 percent acquired vehicles (down 3 points), and 14 percent improved or expanded facilities (down 1 point).  Five percent acquired new buildings or land for expansion (unchanged) and 13 percent spent money for new fixtures and furniture (down 2 points). 

                                                                                      

The percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 26 percent, the third highest reading in this expansion (but historically weak).  Of the 53 percent of owners who said it was not a good time to expand (up 1 point), 30 percent blamed the political climate, second only to economic conditions (47 percent) as a reason for not expanding.  Not seasonally adjusted, 9 percent expected an improvement in business conditions in six months (down 1 point), and 20 percent expected a deterioration (down 2 points). Seasonally adjusted, the net percent expecting better business conditions improved 4 percentage points to a net negative 9 percent.  The seasonally adjusted net percent expecting higher real sales rose 1 point to 2 percent of all owners, not very strong.  Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment. 

 

 

SALES

 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months rose 4 percentage points to a net negative 4 percent, an improvement, but still negative.  Seasonally unadjusted, 25 percent of all owners reported higher sales (up 3 points) and 26 percent reported lower sales (down 6 points) quarter over quarter.  Eleven percent cited weak sales as their top business problem, down 3 points from May. Overall, trends have been improving, becoming less “negative”, but not a sign of much strength.

 

 

 

Unadjusted, 31 percent expect higher real sales volumes in the next three months (down 4 points), while 23 percent expect reductions (up 2 points).  Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 1 point to a net 2 percent of owners, a weak showing.  Expectations for stronger real sales peaked at a net 19 percent in December 2014 but have deteriorated substantially since the first quarter of 2015.

INVENTORIES:

 

The net percent of owners reporting inventory increases was unchanged at a net negative 6 percent (seasonally adjusted), a weak reading.  Unadjusted, 12 percent reported an increase in inventory stocks (down 1 point) and 14 percent reported inventory reductions (down 2 points).  Although depletion of inventory stocks is generally a positive development if it is due to strong sales, this was not the case.

 

The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 4 percent, more owners found stocks to be excessive rather than lean in light of sales expectations.  The net percent of owners planning to add to inventory decreased 2 points to a net negative 3 percent.  These weak inventory readings are consistent with the subpar growth reported in the economy.  It does not appear that second quarter growth was strong enough to eliminate the excesses in inventory stocks.

 

 

 

INFLATION: 

 

Gas prices increased as oil prices rose toward $50 a barrel, but it has not produced enough headline inflation (on the Personal Consumption Expenditures deflator) to breach the Federal Reserve’s 2 percent inflation goal.  Inflationary pressures remain dormant on Main Street.  Twelve percent of owners reported reducing their average selling prices in the past three months (down 1 point and down 6 points from March), and 16 percent reported price increases (down 1 point).  Seasonally adjusted, the net percent of owners raising selling prices was up 1 point from May to 2 percent.  This follows nearly half the year in negative territory, with more owners cutting prices than raising them.  In spite of the Federal Reserve’s efforts, inflation on Main Street is M.I.A.

 

 

Seventeen percent plan on raising average prices in the next few months (down 1 point, 5 points since March) while only 3 percent plan reductions (unchanged), far fewer than will actually report reductions in July.  Seasonally adjusted, a net 16 percent plan price hikes (unchanged).  Prospects for a resurgence of inflation are low, and that’s a good thing for consumers.

 

COMPENSATION AND EARNINGS: 

 

 

A sesonally adjusted net 22 percent of owners reported raising worker compensation, down 4 points.  The net percent planning to increase compensation fell 1 point to a net 14 percent.  The survey does not distinguish between changes in wages and changes in benefits, including health insurance.  The strongest reading in this expansion occurred in January with 27 percent reporting higher employee compensation.  The second best reading, 26 percent, occurred last month (the lowest was a negative 2 percent in 2009), leaving this month’s reading among the best in the recovery in spite of the decline. 

 

The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem rose 2 points to 15 percent, number three on the list of problems behind taxes, and regulations and red tape. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees.

 

Earnings trends were unchanged at a net negative 20 percent reporting quarter on quarter profit improvements.  Not seasonally adjusted, 17 percent reported profits higher quarter to quarter (up 1 point), and 36 percent reported profits falling (down 2 points).  For the economy, profits fell 6 percent in Q1 and are expected to fall by several percentage points in Q2, as anticipated by the gap between the percent of NFIB owners raising compensation and the percent of owners raising selling prices and passing those costs along.  Gas prices are higher, but they are still providing a cushion for the bottom line compared to past years.

 

 

 

 

CREDIT MARKETS:  

 

Five percent of owners reported that all their borrowing needs were not satisfied, 3 points above the record low reached in September 2015.  Thirty-two percent reported all credit needs met (up 1 point), and 47 percent explicitly said they did not want a loan, down 4 points.  However, including those who did not answer the question, presumably uninterested in borrowing, produces a 63 percent figure with no interest in borrowing, down 2 points from last month.  For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow.  Only 2 percent reported that financing was their top business problem compared to 23 percent citing taxes, 19 percent citing regulations and red tape, and 15 percent the availability of qualified labor.  When credit is an issue, owners report it as illustrated by 37 percent reporting credit hard to get in the early 1980s compared to 5 percent today. 

 

 

Twenty-nine percent of all owners reported borrowing on a regular basis (unchanged).  The average rate paid on short maturity loans rose 40 basis points to 5.7 percent.  Loan demand remains historically weak, owners can’t find many good reasons to borrow and invest. 

 

The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, unchanged from May.  Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending.  With one in five business owners expecting business conditions to deteriorate and 57 percent expecting no change from current conditions, prospects for an improvement in loan demand are not particularly good.

 

THE LARGER PERSPECTIVE:

 

Federal Reserve officials had the market all set for a June or July rate hike, then came the employment numbers, stunningly low, and then the BREXIT vote.  Now, many observers expect no hike for the rest of this year, maybe even in 2017.  One data point and a UK vote, and the entire projected policy path is changed.  Not to mention that the data are subject to substantial revisions so who knows where they will land.  For example, Q1 GDP growth estimates started at 0.4 percent and ended up at 1.1 percent, almost 3 times larger.  Financial markets plunged for two days and then made it up the next two, no surprise with 50 percent on each side of the BREXIT bet.  So the policy path remains “data dependent” as if these monthly data points are good guides to longer term growth prospects.  For fiscal policy, the expectation remains the same – no new developments, $600 billion will be added to the deficit.  State and local government spending will pick up modestly, not much to hang your hat on unfortunately.

 

Consumer sentiment went down (University of Michigan) or up (Conference Board) depending on the source, but the most recent retail sales figures were promising.  Consumer spending is critically important to small businesses.  Ford doesn’t sell cars, small business owners do.  The savings rate in Q2 was half a point lower than in Q1, if that went to spending, it will support GDP growth.  The New York Fed’s advance estimates put Q2 growth at 2.1 percent and 2.2 percent for Q3.  The Atlanta Fed is at 2.6 percent for Q2.  That a big difference in terms of job growth. 

 

The NFIB data indicate no surge in growth coming from the small business sector to support Q3 growth.  Capital spending plans are very low in the West South Central states, 18 percent vs 26 percent nationally.  Reports of capital spending in the past six months were also conspicuously low, 43 percent vs 57 percent nationally, and this will weigh on growth numbers.  Hiring plans were weak as well, a net 11 percent planning to create jobs compared to 18 percent nationally.  Faced with the Federal Reserve’s “back-peddling” and BREXIT to add to uncertainty, the prospects for economic growth beyond recent experience are cloudy at best.

 

 

 

 

 

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NFIB began surveys of its membership in October 1973.  Surveys were conducted in the first month of each quarter through 1985 when monthly surveys were instituted.  The first month in each quarter is based on between 1,200 and 2,000 respondents, while the following two monthly surveys contain between 400 and 900 respondents.  The term “net percent” means that the percent of owners giving an unfavorable response has been subtracted from the percent giving a favorable response.  If, for example, 20 percent reported that they were going to increase the number of workers at the firm and 5 percent reported an intention to reduce the number of workers, the “net percent” would be 20 percent – 5 percent  or a net 15 percent planning to expand employment.  These figures are seasonally adjusted unless noted.  The graphs show quarterly data (first survey month in each quarter), updated when available by subsequent monthly surveys.