Small Business Economic Trends — July 2014
SUMMARY
OPTIMISM INDEX
“Foiled again!” The Optimism Index can’t seem to muster a run longer than 3 months. After a promising first half run, the Index fell 1.6 points to 95.0, ending another false start for the Index’s “road to recovery”. The Index did manage to stay above 95, which seemed to be a ceiling on the Index since the recovery started. The good news is that the job components improved again, reaching levels seen only in strong private sector economic times. The bad news is that capital outlays and planned spending faded along with expectations for improving business conditions.
LABOR MARKETS
Seasonally adjusted, 12 percent of the owners (up 1 point) reported adding an average of 3.3 workers per firm over the past few months. Offsetting that, 13 percent reduced employment (up 1 point) an average of 3.1 workers, producing the seasonally adjusted net gain of 0.05 workers per firm overall. The rather substantial dent in first quarter growth did not have much of an impact on Main Street employment. Fifty-three percent of the owners hired or tried to hire in the last three months and 43 percent reported few or no qualified applicants for open positions. Twenty-six percent of all owners reported job openings they could not easily fill in the current period (up 2 points), suggesting more downward pressure on the unemployment rate. Fourteen percent reported using temporary workers, unchanged for several months.
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 fell 1 point to a net negative 2 percent, still one of the very best readings of the recovery period. Thirteen percent cite weak sales as their top business problem, one of the lowest readings since December 2007, the peak of the expansion. Expected real sales volumes posted a 4 point decline, falling to a net 11 percent of owners expecting gains. Lower sales expectations offers no motivation for owners to hire or order more inventories.
The pace of inventory reduction was steady, with a net negative 4 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 2 percent, still a “lean” reading. Sales trends deteriorated a bit but remained at the best levels in the recovery, just historically weak. Expected real sales weakened as well, and this contributed to less urgency to rebuild stocks. The net percent of owners planning to add to inventory stocks fell 2 points to a net negative 1 percent. While inventories have been building solidly at the national level (a car inventory bubble), it appears that the small business sector is adding only a little to the accumulation of stocks reported in the GDP accounts and sales are too weak to produce much liquidation.
CAPITAL SPENDING
Fifty-four percent reported outlays, down 1 point from May and typical of reports in recent months. Overall, spending was a bit weaker than May, but typical of recent readings. A net 11 percent of all owners expect improved real sales volumes, down 4 points. Overall, expectations faded in June, casting a negative cloud over prospects for growth in capital spending. The net percent of owners expecting better business conditions in 6 months fell 10 percentage points to a negative net 10 percent. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 22 percent. Seven percent characterized the current period as a good time to expand facilities, down 3 points and low for a period of growth.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was a net 14 percent, up 2 points from May and 15 percentage points from December. Twenty-two percent plan on raising average prices in the next few months (unchanged). Only 3 percent plan reductions (up 1 point), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 21 percent plan price hikes (unchanged and the fourth highest level since 2008). If successful, the economy will see a bit more “inflation” as the price indices seem to be suggesting.
EARNINGS AND WAGES
Earnings trends deteriorated 1 point to a net negative 18 percent (net percent reporting quarter to quarter earnings trending higher or lower), still one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, but there appears to be an improvement in profit trends in place, even if not historically strong. This is one of the best readings since mid-2007 with the exception of a few months in early 2012 when the economy posted decent growth rates for several quarters. A seasonally adjusted net 21 percent reporting higher worker compensation, up 1 point and among the best readings since 2008. A net seasonally adjusted 13 percent plan to raise compensation in the coming months (down 2 points), still one of the strongest reading since 2008.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, up 1 point and 2 points above the record low. Twenty-seven percent reported all credit needs met, and a record 54 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem. Twenty-eight percent of all owners reported borrowing on a regular basis, down 3 points. A net 6 percent of regular borrowers reported loans “harder to get” compared to their last attempt. The average rate paid on short maturity loans was unchanged at 5.7 percent.
The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 7 percent; more owners expect that it will be “harder” to arrange financing than easier (unchanged).
COMMENTARY
According to the NFIB June survey, June was the best employment month in recent years. BLS agreed, although the headline jobs report was better than the details. Part-time workers rose 1.12 million while full-time employment fell by 523,000. Thus, we swapped two part-time workers for each full-time job lost, not an efficient way to structure the workforce but that reflects the incentive structure created by Washington. Aggregate hours worked were little changed from 2007. The hours worked index was 100.8 for June vs 100 in 2007. After 6 1⁄2 years of “recovery”, the same number of workers are now employed as at the peak in January, 2008, the population of eligible labor force participants is 14 million higher and more of the existing jobs are part-time jobs.
The only two index components that increased in June were labor market indicators: the percent of owners with job openings and the percent planning to create new jobs in the coming months. Reports of actual net job creation per firm were positive for the ninth month in a row. But consumer and business owner optimism remain low, spending growth is weak and sales expectations weak. There are more jobs but not much more output.
The number of allegedly “contrived scandals” in Washington grows, none are being resolved and many are growing in severity. The latest Reuters/University of Michigan poll shows 10 percent of consumers characterizing government policy as “good” and over 50 percent say “poor”. Other than “economic conditions”, the “political climate” is the most frequently cited reason for not expanding businesses. This is the major impediment to a stronger recovery. Owners are experiencing far too much uncertainty and no sign that the powers that be will get any of it resolved.
Economic growth for the rest of the year will continue to be sub-par. Even if the second half is as strong as some predict, the average for the year will be about 2.5 percent. Inflation will pick up, even “core” inflation, although energy and food prices will probably see more lift than other prices. The unemployment rate will fall more due to people leaving the labor force than to jobs being created, fewer hands making GDP. With the election only months away, not much will change in the coming months in Washington or in the economy.
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This survey was conducted in June 2014. A sample of 3,938 small-business owners/members was drawn. Six hundred seventy-eight (672) usable responses were received – a response rate of 17 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2014, the NFIB retains ownership. All Rights Reserved.
