Small Business Economic Trends - May 2014
SUMMARY
OPTIMISM INDEX
The NFIB Index of Small Business Optimism jumped 1.8 points from last month to 95.2. This is the first time the Index has reached 95 since October 2007. The gain is modest but it is still the best reading post-recession. The main contributor to the improved Index came from expected business conditions. Small business owners are a bit more optimistic in this area but still 9 percent more owners expect business conditions to deteriorate than improve.
LABOR MARKETS
NFIB owners increased employment by an average of 0.07 workers per firm in April (seasonally adjusted), weaker than March but the seventh positive month in a row and the best string of gains since 2006. Fifty-one 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. GDP did not grow in the first quarter, so not a lot of new workers were needed. The weather was bad in the first quarter but since the U.S. was not uniformly “frozen”, the weakness in employment and GDP growth cannot be blamed entirely on Mother Nature. Twenty-four (24) percent of all owners reported job openings they could not fill in the current period (up 2 points). Fourteen percent reported using temporary workers, up 1 point from March. Job creation plans reversed a recent negative trend and rose 3 percentage points to a seasonally adjusted net 8 percent. However, not yet back to January’s reading of 12 percent.
INVENTORIES AND SALES
The pace of inventory reduction was steady, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted). Reductions are good if in response to strong sales, but not so good if it is in response to weak sales. Owners are satisfying orders with existing inventory but not ordering new stocks. The net percent of owners viewing current inventory stocks as “too low” lost a point, falling to a net negative 1 percent, historically a “lean” reading. Sales trends did improve, although remained historically weak and probably insufficient to produce a substantial reduction in inventories. The solid reading for expected real sales contributed to the need to rebuild with the net percent of owners planning to add to inventory stocks gaining 2 points to a net 3 percent, following a large 6 point gain in March.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 4 points to a net negative 2 percent, far better than the negative 34 percent readings in 2009). Fifteen (15) percent cite weak sales as their top business problem, high but approaching levels experienced in “normal” times. This is the best seasonally adjusted reading since early 2012 when the economy temporarily reach a more normal growth path. Expected real sales volumes posted a 2 point decline after a strong 9 point gain in March, falling to a net 10 percent of owners. While falling a bit, it is still the third highest reading since early 2012.
CAPITAL SPENDING
Fifty-seven (57) percent reported outlays, up 1 point. The percent of owners planning capital outlays in the next 3 to 6 months also increased 1 point to 25 percent. Eight percent characterized the current period as a good time to expand facilities (unchanged). Of those who said it was a bad time to expand (50 percent), 26 percent still blamed the political environment, suggesting that at least for these owners, Washington is preventing their spending on expansion.
INFLATION
Seasonally adjusted, the net percent of owners raising selling prices was a net 12 percent, up 3 points after an 8 point rise in March. Twenty-five (25) percent plan on raising average prices in the next few months (up 2 points). Only 3 percent plan reductions (unchanged), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 22 percent plan price hikes (up 3 points). If successful, the economy will see a bit more “inflation”.
PROFITS AND WAGES
Earnings trends improved 4 points to a net negative 20 percent, the best reading since 2007. Two percent reported reduced worker compensation and 23 percent reported raising compensation, yielding a seasonally adjusted net 20 percent reporting higher worker compensation (down 3 points), but still among the best readings since 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months, unchanged from February. The reported gains in compensation are now solidly in the range typical of an economy with solid growth.
CREDIT MARKETS
Five percent of the owners reported that all their credit needs were not met, 1 point above the record low. Thirty percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 1 percent reported that financing was their top business problem (the record low). Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point. A net 5 percent of regular borrowers reported loans “harder to get” compared to their last attempt, a 3 point improvement. The average rate paid on short maturity loans was up a tenth at 5.4 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 6 percent, more owners expect that it will be “harder” to arrange financing than easier (1 point better than March). The start of “tapering” seems to have not impacted expectations much. The appointment of the new Federal Reserve Board members will have little impact on policy. Owners remain more concerned about taxes, regulations and health care costs.
COMMENTARY
With the unemployment rate falling to 6.3 percent and headed lower, the Federal Reserve will soon be able to declare victory, leaving economists to debate for years whether QE2 and QE3 really helped or hindered the recovery. The U.S still has $3 trillion in excess reserves sitting at the Federal Reserve, potentially available to support an expansion in loans. The Federal Reserve portfolio has over $4 trillion earning interest that currently accounts for about 10 percent of record-high after-tax corporate profits. Yes, the Federal Reserve is a private firm. This is just one of the major distortions created by the Federal Reserve, and it’s not the worst. Since 2009, consumers have lost trillions of dollars in interest income, a damper on consumer spending. Interest expense per share for the larger firms have fallen by more than 50 percent helping earnings per share to hit record high levels, all based on “unreal” interest rates.
The first quarter preliminary print on GDP growth was 0.1 percent, virtually no change but likely to be revised a bit lower due to the trade deficit. Consumer spending might have been a bit stronger as March data are finalized. Job growth was a lot better than expected for the first quarter, so one wonders where’s the GDP that all these workers are making? Of course, hours worked didn’t go up much, so more people working fewer hours means not so much growth in output. And 800,000 people dropped out of the labor force which accounted for much of the decline in the unemployment rate.
The President is pushing for a 39 percent increase in the minimum wage.
He apparently is not listening to the CBO but to political advisors. There is no doubt that raising the minimum wage will cost jobs. The CBO estimates 500,000 will lose all their income and the chance to gain experience and move ahead. On FOX, a supporter argued that McDonalds made $5 billion and could afford to give up some, forgetting that individual franchises and company stores must stand on their own. If all the independent burger joints suddenly put a golden arch over them and we added them up to get one big profit number, that doesn’t change the economics for each firm. Arguing that this will produce more spending assumes the increased labor costs are covered by the Federal Reserve I guess, since in reality every dollar a minimum wage worker gets will come out of the pockets of customers, and owners, and those who lost their job who will have less to spend, a wash at best. Some really poor thinking.
The President most recently touted policies such as raising the minimum wage, extending unemployment benefits and passing some sort of equal pay for equal work legislation as his plan to boost the economy. He also mentioned one billion in his budget for “climate change and a Keystone delay that will surely boost the economy. This makes it quite clear that politics drives policy recommendations, not common sense. And governing through politics will not improve owner optimism. It’s going to be another nasty election. Most of the policy changes that would improve small business owners’ views of the outlook won’t happen. Growth will push ahead, boosted by population growth, depreciation driven demand for replacement and continued healing from the recession damage, but no rapid pickup in spending or hiring.
This survey was conducted in April 2014. A sample of 10,799 small-business owners/members was drawn. One thousand six hundred and ninety-nine (1,699) usable responses were received – a response rate of 16 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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