Small Business Economic Trends – August 2016

 

Embargoed September 13, 6am

 (Based on 730 respondents to the August survey of a random sample of

NFIB’s member firms, surveyed through 8/29/16)

 

 

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 fell 0.2 points in August to 94.4.

 

The Index of Small Business Optimism fell 0.2 points to 94.4, still well below the 40 year average of 98.  Five of the 10 Index components posted a gain, four declined and one was unchanged.  GDP growth in the last three quarters has averaged 1 percent, not a recession but only matching the growth in the population.  Hard to figure how the capital stock producing that output is valued at record high levels as reflected in the S&P 500 for example.  Maybe the Federal Reserve targeting asset prices with record low interest rates has something to do with that absurdity.  NFIB data also reveal another cause of subpar growth this expansion, a sluggish small business sector, historically half of private sector GDP.  Compared to the 1983 expansion which followed even higher unemployment rates, this recovery has been subpar in all dimensions, and particularly in job creation.  What hasn’t been subpar is the growth in pages of regulation in the Congressional Record and the size of the Federal debt.

 

The outlook for business conditions six months from now deteriorated.  Only 9 percent (seasonally adjusted) view the current period as favorable for business expansion, 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, rising to a record 39 percent.  NFIB’s measure of uncertainty is at record high levels.  This is not a good environment for strong or sustained growth.  Government policy is a major contributor to this uncertainty.

 

 SMALL BUSINESS OPTIMISM INDEX AND TEN COMPONENTS

 

                                                              AUGUST        Change      Share of 

                                                                                                             Change 

CREATE NEW JOBS (net)

 

      9%

       -3

       *%

MAKE CAPITAL OUTLAYS

 

    28%

      +3

       *%

INCREASE INVENTORIES (net)

 

      1%

      +1

       *%

JOB OPENINGS HARD TO FILL

 

    30%

      +4

       *%

INVENTORIES TOO LOW (net)

 

     -2%

      +2

       *%

GOOD TIME TO EXPAND

 

      9%

      +1

       *%

EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS(net)

 

    -12%

       -7

       *%

EXPECT HIGHER REAL SALES (net)

 

      -1%

       -2

       *%

EXPECT EASIER CREDIT CONDITIONS (net)

 

      -5%

 

        0

       *%

EARNINGS TRENDS (net) POSITIVE

 

    -23%

       -2

       *%

 

 

 

 

 

TOTAL CHANGE

INDEX OF SMALL BUSINESS OPTIMISM  (1986 = 100)

 

 

  94.4

  

       -3

    -0.2

      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 remained weak in August with the seasonally adjusted average employment change per firm posting a decline of -0.02 workers per firm. Eleven percent (up 1 point) reported increasing employment an average of 3.7 workers per firm while 14 percent (up 2 points) reported reducing employment an average of 1.8 workers per firm (seasonally adjusted). 

 

Fifty-six percent reported hiring or trying to hire (up 3 points), 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.   This issue ranks third out of nine major issues listed behind taxes and the cost of regulation and red tape.

 

 

Thirty percent of all owners reported job openings they could not fill in the current period, up 4 points and the highest reading in this recovery.  Fifteen percent reported using temporary workers, up 2 points.

 

 

A seasonally adjusted net 9 percent plan to create new jobs, down 3 points from July.  Not seasonally adjusted, 15 percent plan to increase employment at their firm (unchanged), and 10 percent plan reductions (up 4 points).  Owners in the East Central, West North Central and Mountain states appear ready to expand employment while those in the West South Central were the least inclined to create new jobs.  Plans to create new jobs were strongest in construction, followed by manufacturing and financial services.

 

 

 

CAPITAL SPENDING

 

Fifty-seven percent reported capital outlays, down 2 points from July.  Of those making expenditures, 41 percent reported spending on new equipment (up 4 points), 22 percent acquired vehicles (unchanged), and 16 percent improved or expanded facilities (up 3 points).  Five percent acquired new buildings or land for expansion (unchanged) and 12 percent spent money for new fixtures and furniture (up 1 point).  The percentage of owners making an outlay peaked in July 2015 at 61 percent, revisiting that percentage in January but has faded since.

                                                                  

The percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 28 percent.  This is 1 point better than the recovery high reading reached in October 2014, but historically weak.  The small business sector remains in “maintenance mode”.  Of the 52 percent of owners who said it was not a good time to expand, down 3 points, 39 percent were unsure.   Thirty-eight percent blamed the political climate, a record high for this series.  Not seasonally adjusted, 8 percent expected an improvement in business conditions in six months (down 2 points), and 26 percent expected a deterioration (up 5 points).  Seasonally adjusted, the net percent expecting better business conditions deteriorated 7 percentage points to a net negative 12 percent.  The seasonally adjusted net percent expecting higher real sales fell 2 points to a negative 1 percent of all owners, a very weak showing.  Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment as prospects for profits are poor.

                                                                                                                       

 

                                                                                                                                    

 

 

SALES

 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months fell 1 percentage point to a net negative 9 percent.  Seasonally unadjusted, 26 percent of all owners reported higher sales (down 1 point) and 26 percent reported lower sales (unchanged) quarter over quarter.  This series peaked in October 2014 at a negative 2 percent, with the exception of an unexpected and inconsistent reading of 2 percent in 2012 (see chart).  Eleven percent cited weak sales as their top business problem, down 1 point from July.  Reports of strong consumer spending of over 4 percent growth did not improve reports of sales gains.

 

 

 

Unadjusted, 26 percent expect higher real sales volumes in the next three months (unchanged), while 28 percent expect reductions (up 4 points).  Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 2 points to a net negative 1 percent of owners, a weak showing.  Expectations for stronger real sales peaked in the quarterly surveys at a net 14 percent in January 2015 (19 percent in the December monthly survey), but have deteriorated substantially since the first quarter of 2015.

 

 

 

 

INVENTORIES:

 

The net percent of owners reporting inventory gains increased 5 points to a net negative 0 percent (seasonally adjusted), restoring some balance after a major reduction in the first half of the year.  This will provide a boost to GDP because inventory reductions to meet demand are not counted as production and income in the current period.  Unadjusted, 13 percent reported an increase in inventory stocks (unchanged) and 11 percent reported inventory reductions (down 4 points).  Stronger than expected consumer spending produced a sharp reduction in inventory stocks which now appears to be over.

 

The net percent of owners viewing current inventory stocks as “too low” improved 2 points to a net negative 2 percent, reflecting the balance produced by large inventory reductions in prior months and stronger consumer spending.  The net percent of owners planning to add to inventory increased 1 point to a net 1 percent, not a strong picture, but now positive and a contribution to growth if owners follow through as planned. 

 

 

 

INFLATION:  

 

Inflationary pressures remain dormant on Main Street.  Fourteen percent of owners reported reducing their average selling prices in the past three months (down 2 points), and 16 percent reported price increases (up 1 point).  Seasonally adjusted, the net percent of owners raising selling prices rose 5 points from July to 3 percent.  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 (up 2 points) while only 4 percent plan reductions (up 1 point).  Seasonally adjusted, a net 15 percent plan price hikes (up 1 point).  Prospects for a resurgence of inflation are low, especially with gas prices on the decline again.

 

COMPENSATION AND EARNINGS: 

 

 

A seasonally adjusted net 24 percent of owners reported raising worker compensation, unchanged from July.  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 recovery occurred in January with 27 percent reporting higher employee compensation.  The lowest was a negative 2 percent in 2009, leaving this month’s reading among the best in the recovery. 

 

The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem rose 1 point to 15 percent, number three on the list of problems behind taxes, and regulations and red tape.  Beyond the impact of mandates such as a higher minimum wage and health insurance, this suggests continued pressure on compensation, as most firms seeking to hire report few or no qualified applicants.

 

Earnings trends worsened 2 points to a net negative 23 percent reporting quarter on quarter profit improvements.  Not seasonally adjusted, 18 percent reported profits higher quarter to quarter (down 2 points), and 34 percent reported profits falling (down 1 point).  Earnings in the economy appear to be under pressure in the second half.

 

 

 

CREDIT MARKETS:  

 

Four percent of owners reported that all their borrowing needs were not satisfied, 2 points above the record low reached in September 2015.  Twenty-nine percent reported all credit needs met (down 1 point), and 52 percent explicitly said they did not want a loan, down 1 point.  However, including those who did not answer the question, presumably uninterested in borrowing, produces a 67 percent figure for the percent of owners having no interest in borrowing.  Record numbers of firms remain on the “credit sidelines”, seeing no good reason to borrow.  Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 20 percent citing regulations and red tape, and 15 percent the availability of qualified labor.

 

 

Twenty-nine percent of all owners reported borrowing on a regular basis (up 1 point).  The average rate paid on short maturity loans fell 10 basis points to 5.2 percent.  Loan demand remains historically weak, owners can’t find many good reasons to borrow and invest, even with abundant cheap money. 

 

The net percent of owners expecting credit conditions to ease in the coming months was a negative 5 percent, unchanged from July.  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. 

 

THE LARGER PERSPECTIVE:

 

After nine months of 1 percent GDP growth, the economy is set to turn in a better performance.  This will result because the denominator in the change calculation is low, and because the huge inventory reduction that knocked a point off the GDP growth rate appears to be over, with an ever so modest increase in plans to build inventory.  Consumer spending looks like it will maintain some strength, including car sales, although there are mixed signals on consumer sentiment.  It doesn’t appear that capital spending is ready to pick up, but housing will continue to add to growth, even though it is supply constrained, due to a shortage of skilled labor and permitted land.

 

The Federal Reserve has started its regular “hide the rate hike” game, sending observers looking under every rock of data to see if there are 25 basis points underneath.  Most of the “rocks” look like pebbles, there’s not a lot of growth in the landscape, and there’s that darn international thing, the value of the dollar (which is officially not the province of the Fed) and all that.  The inflation and employment goals are defined “downward” in terms of what the Fed might accept, along with prognostications that assure “full” attainment by 2018.  Comments by Chicago Fed president Charles Evans, in remarks to the Shanghai Advanced Institute of Finance in Beijing, indicate that the Fed thinks it is the determining force shaping interest rates, not markets, a very troubling view.  He said, "Long-run expectations for policy rates provide an anchor to long-run interest rates," continuing with "So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path."  These contortions in policy cannot be maintained.  We will regret this arrogance even more over the next decade as our private financial institutions become unable to meet the promises they have made.

 

Population growth will continue to push fundamental growth ahead with more haircuts and houses.  Another 120,000 jobs will keep the unemployment rate steady, but with job openings at the highest level in this recovery, any more than that will likely lower the rate.  Health insurance costs keep rising, diverting compensation gains into benefits rather than take home pay.  Other regulatory pressures such as a rising minimum wage and mandatory paid leave also put an upward pressure on reports of compensation increases.  Capital spending will remain M.I.A., plans are at the highest level for the recovery, matching the previous peak in 2014, but not typical of an expansion and reports of actual spending have been weakening.  Inventory investment will reverse the reductions of the first half of the year and that will add to growth.  Overall, a return to 2 percent growth for the year is expected.

 

==========================================================

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.