Small Business Economic Trends - April 2014
SUMMARY
OPTIMISM INDEX
The latest Small Business Optimism Index rose 2 points to 93.4, mostly reversing the February decline but failing once again to breach the 95 ceiling that has capped the Index during the recovery. Six of the Index components improved, two were unchanged, and two were lower. The net percent of owners planning to create new jobs did fall 2 points but remained positive even if weak. The outlook for real sales gains accounted for about half of the improvement with inventory satisfaction and inventory investment plans accounting for most of the rest. However, throughout this recovery these types of increases have generally gone nowhere. As long as Washington continues to ignore policies that could restore the middle class growth and job creation will continue to be sub- par.
LABOR MARKETS
NFIB owners increased employment by an average of 0.18 workers per firm in March (seasonally adjusted), an improvement over February’s 0.11 reading and the sixth positive month in a row. Forty-nine percent of the owners hired or tried to hire in the last three months and 41 percent reported few or no qualified applicants for open positions. Twenty-two percent of all owners reported job openings they could not fill in the current period (unchanged). Thirteen percent reported using temporary workers, unchanged from February. Job creation plans softened further in February, falling 2 percentage points to a seasonally adjusted net 5 percent compared to 12 percent in January.
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 improved 2 points to a net negative 6 percent. With more firms experiencing lower sales than higher quarter over quarter, the weakness in sentiment is no surprise. Fourteen percent cite weak sales as their top business problem, high but approaching levels experienced in “normal” times. Expected real sales volumes posted a strong 9 point gain, rising to a net 12 percent of owners. A solid improvement even though views about future business conditions remained very negative. While still a historically weak reading, it is one of the very best in this recovery, which has been tepid for years.
The pace of inventory reduction picked up speed, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted), 4 points lower than February. The net percent of owners viewing current inventory stocks as “too low” rose 4 points to a net 0 percent, a positive development. The net percent of owners planning to add to inventory stocks rose 6 points to a net 1 percent, a positive for new orders for inventory.
CAPITAL SPENDING
The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 24 percent. Fifty-six percent reported outlays, down 1 point from February and typical of reports in recent months. Overall, spending was weaker, and typical of recent readings. Owners can’t seem to find reasons to boost spending and remain in “maintenance mode”.
INFLATION
Twelve percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 3 points), and 23 percent reported price increases (up 4 points). Seasonally adjusted, the net percent of owners raising selling prices was a net 9 percent, up 8 points. Overall, there is a little more upward pressure on prices, especially in housing. Twenty-three percent plan on raising average prices in the next few months (down 4 points), matching the percent reporting actual price increases in the past few months, a hint that desired price hikes might be sticking. Only 3 percent plan reductions (unchanged), far fewer than actual reported reductions. Seasonally adjusted, a net 19 percent plan price hikes (down 4 points). If successful, the economy may see a bit more “inflation”.
EARNINGS AND WAGES
Earnings trends improved 3 points to a net negative 24 percent (net percent reporting quarter to quarter earnings trending higher or lower). Rising labor costs are keeping pressure on earnings. Two percent reported reduced worker compensation and 25 percent reported raising compensation, yielding a seasonally adjusted net 23 percent reporting higher worker compensation (up 4 points), the best readings since 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months, unchanged from February and the strongest reading since 2008 as well. The reported gains in compensation are now solidly in the range typical of an economy with solid growth. Hopefully this is a good sign. With a net 23 percent raising compensation, but a net 9 percent raising selling prices, it is easy to see why profits remain under pressure. The issue is how much of the gains are in benefits rather than take-home pay.
CREDIT MARKETS
Credit continues to be a non-issue for small employers. In March only 5 percent of owners reported that all their credit needs were not met, 1 point above the record low. Thirty percent reported all credit needs met, and 48 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 21 percent citing regulations and red tape and 14 percent citing weak sales.
COMMENTARY
First quarter GDP growth is looking pretty slow at just under 2 percent. Weather, trade deficits, and pessimistic consumers and business owners are all taking a toll on spending growth. Uncertainty remains elevated. Consequently, hiring will remain muted compared to previous expansions. There is lots of talk about this looking more like a “new normal”, that the nature of job requirements changed dramatically in the recession. Certainly firms trimmed all the fat and then some in the last 6 years, but technological change wasn’t that dramatic since 2008. Many of the “long term unemployed” would find jobs in an economy with 500,000 more housing starts and a consumer base more willing to spend on services. Washington is floundering and the economy is following suit.
The President is pushing for a 39 percent increase in the minimum wage to address income inequality, to stimulate the economy and help the poor. None of this will occur as jobs will be lost according to a mountain of research and the CBO’s recent report). Certainly not much stimulus there, and most of the increased wage payments will go to families well above the poverty level which is no help for the poor. In addition to fewer jobs, prices will increase to cover the higher labor costs as owners will be paying more for the same work with no extra output. So for every dollar a minimum wage worker receives, it will come out of the pockets of the customers they serve, no increase in spendable income overall. In 2000, firms paid more than the minimum wage to fast food workers because demand was strong and workers generated sales that justified the higher pay. When demand fades, workers can earn less but have a job – unless the minimum wage compels the employer to fire the worker.
The President’s budget contains a billion dollars for “climate change” while the unemployment rate is 6.7 percent and millions can’t find work. The policies that could restore the middle class status of millions by providing job opportunities are not pursued. This will insure that growth and job creation continue to be sub-par.
This survey was conducted in March 2014. A sample of 3,938 small-business owners/members was drawn. Six hundred eighty-five (685) usable responses were received – a response rate of 17 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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