Small Business Economic Trends - June 2014
SUMMARY
OPTIMISM INDEX
The Index of Small Business Optimism posted another gain in May, the third month in a row. The improvement is certainly good news even though the current reading of 96.6 (up 1.4 points) is still “below average” and far from what is considered to be an expansion level. The four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May. So the entire gain in optimism was driven by soft components (sales expectations and business conditions). If these translate into more spending and hiring, growth will get a boost. However, this “optimism” has not translated into more debt financed spending.
LABOR MARKETS
NFIB owners increased employment by an average of 0.11 workers per firm in May (seasonally adjusted), the eighth positive month in a row and the best string of gains since 2006. Fifty-five (55) percent of the owners hired or tried to hire in the last three months and 46 percent reported few or no qualified applicants for open positions. Twenty-four (24) percent of all owners reported job openings they could not fill in the current period (unchanged), providing some downward pressure on the unemployment rate. Fourteen (14) percent reported using temporary workers, unchanged for several months. Job creation plans continued to strengthen and rose 2 percentage points to a seasonally adjusted net 10 percent, approaching “normal” levels for a growing economy, even with no growth last quarter.
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 1 point to a net negative 1 percent, far better than the negative 34 percent readings in 2009. Twelve (12) percent cite weak sales as their top business problem, the best reading since December 2007, the peak of the expansion. Expected real sales volumes increased 5 points rising to a net 15 percent of owners, the best reading since mid-2007. Expectations for improved sales volumes have strengthened substantially, but this has not translated into strong demand for inventories or employees.
The pace of inventory reduction was steady, with a net negative 4 percent of all owners reporting growth in inventories (seasonally adjusted) a more positive overall reading by 2 points. The net percent of owners viewing current inventory stocks as “too low” lost 1 point, falling to a net negative 2 percent, historically still a “lean” reading. Sales trends did improve, although remained historically weak. The solid reading for expected real sales contributed to a need to rebuild but the net percent of owners planning to add to inventory stocks fell 2 points to a net 1 percent.
CAPITAL SPENDING
Fifty-five (55) percent reported outlays, down 2 points from April and typical of reports in recent months. Overall, spending was a bit weaker than April, but typical of recent readings. Owners can’t seem to find reasons to boost spending out of “maintenance mode”. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 24 percent. The net percent of owners expecting better business conditions in 6 months rose to a net 0 percent, a 9 point improvement over April and 18 points better than March. A net 15 percent of all owners expect improved real sales volumes, up 5 points, is also a nice jump. Overall, owners are hinting at better business conditions and sales prospects, but not much movement in the needle yet.
INFLATION
Eight percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 2 points), and 21 percent reported price increases (down 3 points). Seasonally adjusted, the net percent of owners raising selling prices was a net 12 percent, unchanged from April after an 8 point rise in March. Overall, there is more upward pressure on prices. Twenty-two (22) percent plan on raising average prices in the next few months (down 3 points) and only 2 percent plan reductions (down 1 point). Seasonally adjusted, a net 21 percent plan price hikes (down 1 point). If successful, the economy will see a bit more “inflation” as the price indices seem to be suggesting.
EARNINGS AND WAGES
Earnings trends improved 3 points to a net negative 17 percent, one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, but there appears to be steady improvement in profit trends. This is one of the best readings since mid-2007 with the exception of a few months in early 2012 when the economy made an attempt to pick up the pace of economic growth. Three percent reported reduced worker compensation and 24 percent reported raising compensation, yielding a seasonally adjusted net 20 percent reporting higher worker compensation, unchanged and among the best readings since 2008. A net seasonally adjusted 15 percent plan to raise compensation in the coming months (up 1 point), the strongest reading since 2008.
CREDIT MARKETS
Five percent of the owners reported that all their credit needs were not met, unchanged and 1 point over the record low. Thirty (30) percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem compared to 25 percent citing taxes. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 1 point. 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 up three-tenths 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.
COMMENTARY
The Index continued to improve, to the highest level since September 2007. That’s the good news. Three gains in a row – could be the start of a trend, although we have had quite a few of these along the way that didn’t pan out. Not so good is that virtually all of the gain came in expectations for sales and for business conditions, the real spending/hiring components collectively lost 1 point. Still, expectations lead actual decisions, and the gains were large. And the employment measures held ground, so something is going somewhat well. Sales and profit trends are the best seen in years and that is an important motivator for hiring, which strengthened, and capital spending, which unfortunately remained uninspired by the expectations gains. Price hikes are becoming less “tame” but not a real inflation threat yet, and owners, although feeling better about sales prospects and business conditions, are still not willing to borrow and spend. Loan demand remains historically weak and few complain about credit availability or cost.
The “bifurcation” continues, with the S&P 500 hitting new record highs while the output of the firms being valued (GDP) fell 1 percent at an annual rate in the first quarter and the second quarter seems off to a weak start. Profit performance was not great (down 34 percent at an annual rate, down 4 percent year over year) but this did not deter investors who were further enticed to buy equities by a bond market rally. Although the Federal Reserve has declared that we are wealthier than at any time in history, it doesn’t feel that way. All that wealth isn’t producing much consumer spending. Consumption is estimated to rise 2 cents for every dollar increase in stock market wealth and 10 cents for every dollar in housing wealth, thought to be more permanent, at least until the housing bubble burst. And it is hard to believe that after the housing bubble and the worst recession since the Depression, that we could be so wealthy so quickly. Perhaps the values we are attaching to the assets we all own are not realistic (viz. the Fed’s distortion of a very important price, interest rates).
Chairman Yellen has promised to keep rates low and provide substantial accommodation. Although it is not clear that buying a trillion dollars of bonds really helps the real economy much, just big banks and traders. So, the stock and bond markets get continued artificial support and consumers lose “normal” interest income - and the Fed’s portfolio grows.
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This survey was conducted in May 2014. A sample of 3,938 small-business owners/members was drawn. Six hundred seventy-eight (678) 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.
