November 2014 Report: Moderate improvement, but no clear direction

The Small Business Optimism Index gained 0.8 points, restoring the August reading of 96.1, either a strong recession reading or a weak expansion reading, no clear direction. The average of the Index from 1974Q4 to 2014 to date is 98, which includes all the Great Recession readings. The responses to the ten Index component questions would have to improve by a net 20 percentage points just to get to the average. Overall, the Index and its components anticipate more of the same, for employment growth and for Gross Domestic Spending (GDP less exports), a more relevant measure for small business owners. 

Labor markets, although improved, are still sloshy. Seasonally adjusted, 13 percent of the owners (unchanged) reported adding an average of 2.7 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (unchanged) an average of 2.9 workers, producing the seasonally adjusted net gain of 0.0 workers per firm overall. Twenty- four percent of all owners reported job openings they could not fill in the current period, up 3 points, a good sign for improvements in the unemployment rate. Job creation plans improved a point to a seasonally adjusted net 10 percent. Not a lot of strength in these numbers but consistent with steady growth in employment. 

The pace of inventory reduction dropped sharply (a 6 point improvement), with a net negative 1 percent of all owners reporting growth in inventories (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” slipped 3 points to a net negative 3 percent, suggesting that stocks are excessive relative to sales expectations. The net percent of owners planning to add to inventory stocks rose a point to a net 3 percent. Overall, not much movement, but with a positive tinge to the picture. 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 1 point to a net negative 3 percent, a rather poor picture even if improved. Twelve percent cited weak sales as their top business problem, one of the lowest readings since December 2007, down 2 points.
Expected real sales volumes posted a 4 point gain, rising to a net 9 percent of owners expecting gains. Overall, these readings are more like a recession period than one of expansion. 

Fifty-six percent reported outlays, unchanged from September and not an especially strong reading. The percent of owners planning capital outlays in the next 3 to 6 months rose 4 points to 26, the second strongest reading since early 2008 and only a point below the expansion record set in August. The net percent of owners expecting better business conditions in 6 months fell 1 percentage point to a negative net 3 percent, not a very encouraging reading. A net 9 percent of all owners expect improved real sales volumes, up 4 points. Overall not a very positive outlook and not supportive of a boost in capital spending. 

Earnings trends deteriorated another point, reaching a net negative 20 percent. Two percent reported reduced worker compensation and 21 percent reported raising compensation (up 2 points), yielding a seasonally adjusted net 19 percent reporting higher compensation, up 1 point, bouncing back from a 4 point decline in September. A seasonally adjusted net 13 percent plan to raise compensation in the coming months (down 2 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, but the reversal was disappointing for employees as it signals weaker labor demand and soft labor markets. 

Four percent of the owners reported that all their credit needs were not met, returning to the historic low. Twenty-nine percent reported all credit needs met, and 53 percent explicitly said they did not want a loan (67 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 22 percent citing regulations and red tape and 12 percent citing weak sales. Eleven percent complained about the availability of qualified labor. 

Twenty-eight percent of all owners reported borrowing on a regular basis, down 3 points and a record low. The average rate paid on short maturity loans increased 10 basis points to 5.5 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 5 percent; 2 points better than September. Interest rates are low, but prospects for putting borrowed money profitably to work are not great and so loan demand remains weak among small business owners. Low rates have not triggered the growth in spending that would deliver a good cash flow on business investments. 

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