October NFIB: Small Business Optimism Flatlined in October
OPTIMISM INDEX
Index of Small Business Optimism was unchanged in October, posting no change after a rise of only 0.2 points in September and a gain of only 0.5 points in August. So the Index remains stuck at a below average reading of 96.1. Although the labor market components posted minor declines, they held at historically strong levels but this time owners reported no net growth in employment, a significant decline from reports in the previous four months.
LABOR MARKETS
Reported job creation came to a halt in October, with owners adding a net 0.0 workers per firm in recent months. Fifty-five percent reported hiring or trying to hire (up 2 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, unchanged from September. Twentyseven percent of all owners reported job openings they could not fill in the current period, unchanged from September. A seasonally adjusted net 11 percent plan to create new jobs, down 1 point. A seasonally adjusted net 21 percent of owners reported raising worker compensation, down 2 points from the past few months. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem fell 3 points to 13 percent, but still third on the list of problems behind taxes and regulations and red tape.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months deteriorated 7 percentage points to a net negative 8 percent. Twelve percent cited weak sales as their top business problem, up 1 point. Expected real sales volumes posted a 3 point improvement, rising to a seasonally adjusted net 4 percent of owners expecting gains, a long way down from the 20 percent reading in December 2014. Overall, not a very positive outlook, but at least positive.
The net percent of owners reporting inventory increases was a net negative 2 percent (seasonally adjusted), down 2 points. The net percent of owners viewing current inventory stocks as “too low” was unchanged a net negative 4 percent, as weak sales made current stocks look excessive and future sales are not expect to grow much. The net percent of owners planning to add to inventory fell 3 points to a net 0 percent, not much help for Q4 GDP growth.
CAPITAL SPENDING
Fifty-eight percent reported capital outlays, unchanged from August and September. The percent of owners planning capital outlays in the next 3 to 6 months gained 1 point to 26 percent, not a strong reading historically but among the best in this expansion. Owner expectations for the economy overall appear to anticipate a continuation of “under-performance”. Investment plans remain historically sub-par, and owners have little interest in borrowing to support investment spending that promises little return. The small business sector remains in “maintenance mode”.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, up 1 point from September. This is bad news for the Federal Reserve which is trying to stoke the flames of inflation in order to prevent deflation from setting in. For the rest of us, low inflation is good news. Seasonally adjusted, a net 14 percent plan price hikes (up 1 point). If history repeats, this will be offset by unplanned reductions in selling prices.
PROFITS AND WAGES
Earnings trends deteriorated 3 points, falling to a negative 16 percent. Far more owners are reporting profits lower quarter to quarter than higher. A seasonally adjusted net 21 percent of owners reported raising worker compensation, down 2 points from September and 4 points below the expansion high reading reached in January and May. The net percent planning to increase compensation rose 1 point to 17 percent, still strong for this recovery.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, up 1 point from the record low reached in September. Thirty percent reported all credit needs met (unchanged), and 53 percent explicitly said they did not want a loan. 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. In the Great Recession, no more than 5 percent cited credit availability and interest rates as their top problem compared to as high as 37 percent in the Volcker era.
Twenty-eight percent of all owners reported borrowing on a regular basis, down 1 point. The average rate paid on short maturity loans rose 30 basis points to 5.1 percent. Loan demand remains historically weak, owners can’t find many good reasons to borrow to invest when expectations for growth are not very positive.
The net percent of owners expecting credit conditions to ease in the coming months was a negative 5 percent, a 1 point improvement. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to substantially step up their borrowing and spending.
COMMENTARY
The Federal Reserve decided not to help the economy by surprising markets with no change in the Fed Funds rate in September, adding to the large cloud of uncertainty. Instead the Fed indicated that China and other weak countries needed their support along with domestic players threatened by global weakness. Those concerns are being “walked back” by FOMC members in the face of widespread angst from all quarters. Living in their world of models, QE is supposed to work, hoarding trillions of dollars of risk free assets is supposed to be a “positive”. For some FOMC members, reality has not yet set in. One FOMC member even supports more QE. But, what would that accomplish other than adding to their already unnervingly large portfolio?. Owners make it clear that credit availability and costs are not holding them back. But 40 percent are significantly distressed about Fed indecisiveness and another 35 percent are “somewhat” concerned. More “uncertainty” is the enemy of small businesses. What does the Fed fear that few others seem to worry about?
GDP growth languished in Q3, and will not likely impress in Q4. The industrial sector is weakening and the small business sector has not returned to its historical role in the production of GDP and jobs. The October NFIB survey gave no indication of a resurgence in growth in the small business sector, readings remaining below average.
Consumer sentiment (University of Michigan) rose in October, but only to the second lowest reading for the year, not a great performance. The lowest reading was reached in September. The gain was driven by the low income segment as the top income group was apparently depressed by stock market gyrations. Over 60 percent reported hearing unfavorable news about the economy. Far more consumers think government policy is “poor” than think it is “good” (39 percent vs 16 percent). Over 20 percent of owners who think it is a bad time to expand blame “”political uncertainty.”
Supporting the views of her former boss, Hillary Clinton now blames the Middle East refugee problem on “climate change”, the cause of all bad things. This remains the “center piece” of President Obama’s policy model and prospects for dealing with tax reform, the rising cost of health care, and the flood of capital-devouring regulations are dim. This will continue to depress growth in Q4 and into 2016.
