NFIB Small Business Economic Trends - June 2017

 

Embargoed Tuesday, July 11 at 6 a.m.

 

 (Based on 624 respondents to the June survey of a random sample of

NFIB’s member firms, surveyed through 06/30/17)

 

 

Overview

 

The Index of Small Business Optimism fell 0.9 points to 103.6, but sustained the surge in optimism that started the day after the election.  Four of the 10 Index components posted a gain, five declined and one was unchanged.    The Index peaked at 105.9 in January and has dropped 2.3 points to date, no doubt in part due to the mess in Washington D.C.  Progress is being made, but poorly communicated, and the biggest issues, Obamacare and tax reform remain stuck in the bowels of Washington politics.  Economic growth in the first half of this year will be about the same as we have experienced for the past 3 or 4 years, no real progress.  And there isn’t much euphoria in the outlook for the second half of the year.

 

Regionally, the most enthusiastic firms are in the East South Central, South Atlantic, Mountain and Pacific states, bi-coastal optimism.   Across industry groups, the most optimistic owners are in Construction, Manufacturing, Finance and Real Estate and Professional Services.

 

 

 

 

Labor market indicators eased a bit, but remain historically strong.  However, reported actual hiring indicated weak net job creation.  Capital spending and inventory investment plans strengthened.  Reports of actual capital outlays in the last few months weakened a few points.  Expectations for economic strength in the second half weakened as fewer owners expected the economy to get better and fewer expected higher real sales.  Weaker consumer sentiment (University of Michigan) provided a sympathetic view, no growth spurt expected in the second half.  Consumer spending sagged, and the net percent of owners reporting positive sales trends quarter over quarter turned decidedly negative.

 

 

 

 

Small Business Optimism and Ten Components

 

                                                                   June          Change          Share of 

                                                                                                             Change 

CREATE NEW JOBS (net)

 

 

     15%

       -3

       *%

MAKE CAPITAL OUTLAYS

 

 

     30%

      +2

       *%

INCREASE INVENTORIES (net)

 

 

       4%

      +3

       *%

JOB OPENINGS HARD TO FILL

 

 

     30%

       -4

       *%

INVENTORIES TOO LOW (net)

 

 

      -3%

      +3

       *%

GOOD TIME TO EXPAND

 

 

     21%

       -2

       *%

EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS(net)

 

 

     33%

       -6

       *%

EXPECT HIGHER REAL SALES (net)

 

 

     17%

       -5

       *%

EXPECT EASIER CREDIT CONDITIONS (net)

 

 

      -3%

 

      +1

       *%

EARNINGS TRENDS POSITIVE (net)

 

 

    -10%

        0

       *%

 

 

 

 

 

 

TOTAL CHANGE

INDEX OF SMALL BUSINESS OPTIMISM  (1986 = 100)

 

 

 

  103.6

  

       -11

      -0.9

      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

 

 

Small business owners reported an adjusted average employment change per firm of negative 0.04 workers per firm over the past few months, basically zero. This followed one of the best readings since 2008 posted in May.  Ten percent (down 5 points) reported increasing employment an average of 3.4 workers per firm and 11 percent (up 2 points) reported reducing employment an average of 2.1 workers per firm (seasonally adjusted). 

 

Fifty-four percent reported hiring or trying to hire (down 5 points), but 46 percent (85 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 (down 4 points), third on the list of important problems behind taxes and regulatory costs.

 

 

 

 

 

 

Thirty percent of all owners reported job openings they could not fill in the current period, down 4 points, but historically very high. Eleven percent reported using temporary workers, down 1 point.  Reports of job openings were most frequent in Construction (44 percent), Manufacturing (36 percent) and Professional services (35 percent).  Openings for “unskilled” workers were most frequent in Manufacturing (17 percent), Retail (13 percent, includes restaurants), Agriculture (12 percent), and Construction (10 percent). 

 

 

A seasonally adjusted net 15 percent plan to create new jobs, down 3 points.  Not seasonally adjusted, 20 percent plan to increase employment at their firm (down 6 points), and 4 percent plan reductions (up 1 point). 

 

 

Hiring plans were strongest in Construction, Manufacturing, the Wholesale Trades and Professional Services.  The “action” appears to be holding up in the construction sector and manufacturing is doing well.  Professional services employment may reflect continued growth in health care.  By Region, hiring plans are strongest in the West and in the Pacific states in particular.  Activity in the East South Central states and South Atlantic states looks solid as well.

 

CAPITAL SPENDING

 

Fifty-seven percent reported capital outlays, down 5 points.  Of those making expenditures, 40 percent reported spending on new equipment (down 6 points), 21 percent acquired vehicles (down 5 points), and 13 percent improved or expanded facilities (down 2 points).  Four percent acquired new buildings or land for expansion (down 2 points) and 11 percent spent money for new fixtures and furniture (down 3 points).  Capital spending has faded from earlier in the year, most likely due to fading expectations for sales growth and the economy, not to the Federal Reserve interest rate hike which has not significantly impacted longer term rates.

 

 

 

Perhaps the decline will be reversed in the coming months as the percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 30 percent, the strongest reading since 2007.  Plans were most frequent in Professional Services (33 percent) and Agriculture and Retailing (32 percent each).

 

 

 

SALES

 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was a negative 4 percent, a 9 point decline from the 5 percent reading last month, the best reading since May 2015.  Although consumer income posted decent gains, spending barely increased in June and the savings rate went up instead.

 

 

 

 

Seasonally adjusted, the net percent of owners expecting higher real sales volumes lost 5 points, falling to a net 17 percent of owners.   This is not promising for second half growth, as owners are less likely to hire, order new inventory or increase their capacity with new investment when sales prospects are not strong.

 

 

INVENTORIES:

 

The net percent of owners reporting net inventory increases deteriorated 2 points to a net negative 3 percent (seasonally adjusted), the third consecutive month of inventory stock reductions.  Shedding the excess stocks accumulated earlier in the year is a negative for GDP math going forward (GDP measures production and income in the current period, inventories were produced in prior periods and counted in GDP then).

 

The net percent of owners viewing current inventory stocks as “too low” improved 3 points to a net negative 3 percent, as firms trimmed their excess inventory stocks over the past 3 months. Perhaps the now-reduced levels of stocks are viewed as closer to balance, suggesting that even at modest sales growth levels, new inventories might be needed soon.

 

The net percent of owners planning to add to inventory rose 3 points to a net 4 percent, the highest reading this year to date.  This is a positive indicator for second half growth and a bit surprising in light of the weakness in sales expectations.

 

 

INFLATION: 

 

The net percent of owners raising average selling prices posted a surprising 6 point decline in June, falling to 1 percent.  Eleven percent of owners reported reducing their average selling prices in the past three months (up 2 points), and 14 percent reported price increases (down 5 points).  The June numbers terminate a soft trend of rising prices in the small business sector, bad news for the Federal Reserve which is worried over languishing inflation, which remains below their 2 percent goal.  Lower energy prices are contributing to a softening of the inflation numbers.

 

 

 

Seasonally adjusted, a net 19 percent plan price hikes (down 2 points). 

But if spending remains soft, owners will have difficulty making desired price hikes stick.

 

COMPENSATION AND EARNINGS: 

 

Reports of increased compensation fell 4 points to a net 24 percent.  Owners complain at record rates of labor quality issues, with 85 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions.  A near- record 15 percent selected “finding qualified labor” as their top business problem, far more than cite weak sales their top challenge.  There is little that government policy can do to deal with this problem short of freeing up the educational system to innovate and respond to market needs.  Rising compensation will attract workers back into the labor force but it is a slow process.   The frequency of reported compensation gains (wages and benefits) has grown far faster than the percent of owners raising selling prices and passing these costs on to customers.  The Federal Reserve is hoping that rising compensation will produce the inflation that they are trying to create but so far, prices are not being pushed up.

 

 

 

 

 

The frequency of reports of improved profit trends was unchanged at a net negative 10 percent reporting quarter on quarter profit improvements, historically an excellent reading and one of the best readings in this expansion.  The ability to raise prices received little credit for higher profits.  The inability of firms to raise prices limits the extent to which firms can raise worker compensation and defend their bottom line.  But rising labor costs, due to shortages or, more widely, to government regulation, will continue to pressure the bottom line until demand is strong enough to support rising selling prices.

 

 

 

CREDIT MARKETS:  

 

Four percent of owners reported that all their borrowing needs were not satisfied, up 1 point and historically very low.  Twenty-seven percent reported all credit needs met (down 4 points) and 54 percent explicitly said they did not want a loan, up 3 points.  The reduction in the percent not having their credit needs satisfied moved to the “don’t want a loan” category.  Including those who did not answer the question, 69 percent of owners have no interest in borrowing, up 3 points.  Only 1 percent reported that financing was their top business problem compared to 22 percent citing taxes, 19 percent citing regulations and red tape, and 15 percent the availability of qualified labor.  Weak sales garnered 10 percent of the vote.

 

Twenty-seven percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans was down 30 basis points at 5.6 percent. Overall, loan demand remains historically weak, even with cheap money.  Small businesses have been restructuring over the past ten years and are in a good position to borrow once they have a good reason to do so.

 

 

 

The net percent of owners expecting credit conditions to ease in the coming months improved 1 point to a net negative 3 percent. The Federal Reserve is expected to raise rates several times this year, but that will still leave rates historically low.  Lenders will appreciate higher yields on loans, but loan rates will have little impact on the decisions of owners to “take the plunge” once economic conditions and policies change convincingly.  Hopefully the Federal Reserve will give up control of interest rates to markets and not the whims of social engineers.

 

 

THE LARGER PERSPECTIVE:

 

Federal Reserve chair Yellen suggested that we would not have to worry about another financial crisis in our lifetime, a good indication that the Federal Reserve governors are not closely connected to reality.  Perhaps one of our biggest risks is “policy arrogance”, regulators who believe that have the power to run the economy as they think (or their models say) it should perform.  The last regime at the Fed testified that there was no housing bubble that needed policy attention.  Not long after that tens of thousands of small businesses and their employess failed in the Great Recession.  The global distortions of the QEs will affect our economy for a long time.  Too much liquidity, central banks hoarding riskless assets, keeping yields low as private sector demand for riskless assets support bond prices.

 

First quarter GDP growth was finalzed at 1.4 percent, a poor performance even after allowing for the pecularities of GDP accounting.  Consumer sentiment (University of Michigan) fell a few points to the lowest reading this year, apparently consumers are not finding the economy looking a lot better going forward.  This, even though income grew at the fastest pace in two years.  Much of this growth was due to dividends, which most consumers don’t receive as part of their regular income.  Spending grew very little and more small business owners reported sales declines quarter on quarter than reported gains. Second quarter growth will be much stronger than Q1, although still likely to be unimpressive.   Consumer saving is up and auto sales were sluggish.  Over the last 12 months, reports that the government is doing a good job peaked in January at 28 percent but is now at its lowest level since last June when it was 19 percent.

 

Lower energy prices are once again providing “dividends” to fuel users, consumers and businesses alike.  This uniquitous benefit is not as powerful for the economy as it used to be because energy production is now significant in the U.S. economy.  Historically, lower oil prices impacted producers outside of the U.S. economy but now affect our large and growing energy sector.  Even so, energy related profits are dominating the profit picture among the Fortune 500 firms.  Cheap oil looks to be a dependable source of reduced costs for the near term.

 

Headline unemployment rates of 4.3 percent (U-3) and 8.4 percent (U-6) are at recovery low levels. This excludes 4.5 million workers who say they want work but haven’t looked in 12 months.  Including them would take the U-6 rate up near 11 percent.  Labor force participation rates for men and women remain below levels of the past few decades and “employed part-time for economic reasons” remains above levels typical of an expansion.  It appears that many potential workers have found acceptable levels of support without becoming officially employed.  The 1983 expansion created jobs at twice the rate of this recovery and twice the GDP growth rate, with or course very different economic policies.

 

A continuation of the high levels of optimism in the small business sector will depend heavily on Congressional progress on the major issues for small businesss owners : health care, tax reform and regulatory relief. More Democrats supported a bill declaring President Trump mentally incompetent than supported Kates Law, illustrating the intransigency of the Democrat party when it comes to passing sensible legislation.  The Republicans have the votes to pass any bill that they agree on, but seem unable to agree on any bill, unable to find one that satisfies all the “opinion camps” in their membership.  Because of this, by withholding all their votes on anything, the Democrats can block any bill which has only a few senators in opposition.  More substantial progress is needed on these major issues if owner optimism is to be sustained and produce accelerated hiring and spending.

 

             

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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.