December 2014 Report: Small business optimism perks up in December
SUMMARY
OPTIMISM INDEX
The Small Business Optimism Index gained 2.3 points, at long last taking the Index back to its pre-recession average and the highest reading since October 2006. While last month’s gain was accounted for just 2 of the 10 Index components (expected business conditions and real sales), the gain in December was broad-based, with 8 components advancing, one unchanged and one declining by just 1 percentage point. The single component posting a decline was expected business conditions 6 months out. Last month, this component posted a 16 point gain, so the 1 percentage point decline simply confirmed the very strong gain in November.
LABOR MARKETS
Fifty-four percent reported hiring or trying to hire, but 43 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, down 1 point. Twenty-five percent of all owners reported job openings they could not fill in the current period, up 1 point from November and a very solid reading. This anticipates a further reduction in the unemployment rate even if job creation is not especially strong. Job creation plans improved 4 points to a seasonally adjusted net 15 percent, one of the stronger readings in NFIB survey history. This is a number consistent with the stronger GDP growth reported in the second half of the year and anticipates a ramp in private sector hiring.
INVENTORIES AND SALES
The pace of inventory reduction shifted to a neutral position, with a net 0 percent of all owners reporting growth in inventories (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 3 percent. The net percent of owners planning to add to inventory stocks rose 3 points to a net 5 percent, consistent with the improved outlook for sales growth and the positive trend in sales gains. Although satisfaction with current stocks was not strong, if the expected improvements in sales materialize, stocks will be quickly reduced and inventories will need to be built.
Expected real sales volumes posted a 6 point gain, rising to a net 20 percent of owners expecting gains, this on top of November’s 5 point gain. Sales prospects are looking up. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months gained 6 points, rising to a net 2 percent. Eleven percent cited weak sales as their top business problem, one of the lowest readings since December 2007. Consumers really did start to show up, the best thing that can happen to a small business owner. Stronger sales can help cover the rising costs of a burdensome government.
CAPITAL SPENDING
Sixty percent reported outlays, up 3 points from November and the strongest reading since December 2007, the peak of the last expansion. Of those making expenditures, 42 percent reported spending on new equipment (up 3 points), 23 percent acquired vehicles (up 1 point), and 16 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (up 2 points) and 12 percent spent money for new fixtures and furniture (up 2 points). The percent of owners planning capital outlays in the next 3 to 6 months rose 4 points to 29, the best reading for this expansion but still a bit weak historically. A net 20 percent of all owners expect improved real sales volumes, up 6 points on top of November’s 5 point gain. These readings are very supportive of stronger capital spending in 2015.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was a net 4 percent, unchanged. There are no inflation pressures coming from Main Street. Twenty-nine percent plan on raising average prices in the next few months (up 6 points), perhaps in anticipation of strong sales which will support price hikes. Four percent plan reductions (up 1 point), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 22 percent plan price hikes (up 3 points). Should these plans be realized, small businesses will become an engine of inflation.
EARNINGS AND WAGES
Earnings trends improved 2 percentage points, reaching a net negative 15 percent (net percent reporting quarter to quarter earnings trending higher or lower). Perhaps the expected sales growth will be supportive of a growth in profits. Three percent reported reduced worker compensation and 24 percent reported raising compensation, yielding a seasonally adjusted net 25 percent reporting higher compensation, up 4 points. A seasonally adjusted net 17 percent plan to raise compensation in the coming months (up 2 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations.
CREDIT MARKETS
Four percent of the owners reported that all their credit needs were not met, holding at the historic low. Thirty-two percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. 2 points. The average rate paid on short maturity loans fell 50 basis points to 5.1 percent. Loan demand remained historically weak. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 5 percent; 1 point better than November. Interest rates are low, prospects for putting borrowed money profitably to work seem to be improving but loan demand remains weak among small business owners.
COMMENTARY
The BEA reported a blow-out economy in Q3 and Q4 appears to have been OK. But “low rates for too long” never produced the spending surge the Federal Reserve expected. As pointed out years ago in this report, the economy would heal itself in spite of the impediments and distortions government policy put in place, allowing the Federal Reserve to declare “victory” even if its policies were counterproductive as many observers and even some Federal Reserve officials believed. The cost of the QEs is far from clear and remain to be determined. Certainly QE1 was the right move, but only financial markets were the primary beneficiaries of subsequent actions, not the real economy. Fiscal and regulatory policy have provided no help, forcing firms to spend more of their scarce resources complying with record amounts of regulation and leaving the budget and tax policy floating without direction. The budget deficit has declined by a trillion dollars mostly without the benefit of major spending cuts or priority realignments.
So, it took 41⁄2 years from the start of the recovery for the Index of Small Business Optimism to reach its pre-recession average, slogging along, and never once posting an above average reading. Assuming that non-member firms are similar to NFIB members as they are certainly subject to the same economic winds, half of the economy was not participating in the “recovery”, a bifurcated economy. Large firms profited, sending profits and the stock market to record levels, but that success was not shared on Main Street.
The recovery of Main Street which consists of about 5.5 million firms with fewer than 20 employees, can provide a good base for stronger economic growth. But any election euphoria that persists will soon be snuffed out if Congress cannot lay out a positive plan and make some progress on the top problems facing small business owners including: health insurance costs, uncertainty about economic policy, energy costs, the cost of regulations and red tape and the tax code which is too confiscatory, too complex, and changed too often. Prospects for progress are not that good with President Obama still holding his veto pen.
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This survey was conducted in December 2014. A sample of 3,938 small-business owners/members was drawn. Five hundred sixty eight (568) usable responses were received – a response rate of 14 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2014, the NFIB retains ownership. All Rights Reserved.
