Econintersect: The National Federation of Independent Business (NFIB)'s December 2012 monthly optimism index rose marginally 0.5 to 88.0 - but still is the second lowest since March 2010, and remains one of the lowest historical index levels.
NFIB reports usually contain blasts directed at Washington.
“Congress played chicken right up to the end of the year, leaving small-business owners with no new information about the economy’s future—no sense of how much their taxes would increase or if the economy would go over the now infamous ‘cliff,’” said NFIB chief economist Bill Dunkelberg.
The eleventh hour ‘deal’ has brought marginal certainty about tax rates and extenders and will provide some relief to owners, but it certainly doesn’t guarantee a more positive forecast for the economy. The January survey results will be far more enlightening about how the sector views the deal—higher taxes and minimal spending cuts may not be a panacea. And let’s not forget what is looming on the horizon: a debate over the debt limit and a regulatory avalanche of historic proportions about to spill out into the country. Happy New Year.”
The Index is at a recession level reading as pessimism prevails; December’s reading is certainly not typical during a recovery. Seventy (70) percent of owners surveyed characterized the current period as a bad time to expand; one in four of them cite political uncertainty as the top reason. Taxes (23 percent) and regulations (21 percent) rank as the top two business problems, with “poor sales” as a close third (19 percent).
December was more of the same, uncertainty right up to the last minutes of 2012 and then over the cliff, at least for a few hours. Then something was cobbled together, cans were kicked, taxes went up. What a way to run a business. It’s like the Greek Railroad (ok, the entire Greek government), revenues are far short of labor costs so it borrows money each year to keep operating, building up debt until lenders will no longer pretend to believe that the debt can ever be repaid. Governments have turned into “consols,” no real maturity at which the debt will actually be repaid, just pay the ever increasing cost of servicing the debt until that is so big, they can’t operate any more.
The current Index value of 88 is a recession level reading. There isn’t much else to say beyond that. Inventory demand fell, job creation plans weakened, both from levels that were already in the hole. Capital spending remains weak. Seventy percent of the owners characterize the current period as a bad time to expand; one in four of them cite political uncertainty as the top reason. This “uncertainty” is likely to be a headline player for at least the first half of 2013. As the year progresses, those looking for some meaningful progress on the deficit are likely to be disappointed. Spending will not be cut in any substantial way. Many new “taxes” will be imposed. The Federal Reserve will keep financing the deficit, continually expanding its portfolio. Eventually the Federal Reserve will be able to declare victory (unemployment rate at 6.5%) even if its policies are benign or even mildly counterproductive. The private economy will take care of that in spite of all the impediments government puts in its way. But it could be so much better with some intelligent management.
There will be a few bright spots; housing will recover, driven by demographic necessity (and some weather). That’s a small business industry. Energy will continue to generate jobs. Creating new wells requires all types of labor. However, once drilled, not much labor is required to keep the gas and oil flowing. But cheap oil and gas will create a demand for retrofitting and attract new business that will need new plant and equipment. Car sales will be solid in 2013 as well.
But overall, economic policy will be restrictive. There is no way we can avoid “going over the cliff” in some form or another. Spending must slow and taxes will rise. New income tax rates are now set, but there are many more “hidden” taxes. There will be reductions in spending somewhere, and that’s a reduction in incomes for some workers and firms. Whatever the resolution of the “cliff”, it will not provide a stimulus unless it somehow turns out to be a very sensible bargain which makes consumers and owners more optimistic about the future. Health care costs are rising as well. Minimum wages are rising, impeding job creation. Our trading partners are weaker, reducing export demand. Consumers still have a debt hangover from the party. All this “sludge” on the road will reduce the speed of economic growth.
Some other highlights of December’s Optimism Index include:
- Sales: Small-business sales showed some improvement, with the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months improving 5 points, but rising only to a negative 10 percent. Seasonally unadjusted, 18 percent of all owners reported higher sales (last three months compared to prior three months, down 1 point), and 30 percent reported lower sales (down 1 point). Consumer spending remains weak, especially on services although auto sales have recently shown some strength. The net percent of owners expecting higher real sales volumes rose 3 points to a negative 2 percent of all owners (seasonally adjusted), 14 points below the 2012 high of net 12 percent reached in February. Not seasonally adjusted, 20 percent expect improvement over the next 3 months (up 1 point) and 40 percent expect declines (down 3 points).
- Job Creation: Job creation in December was essentially zero, although it improved infinitesimally from the November report. The average change in employment per firm increased to 0.03, up from -0.04 workers, with 11 percent of surveyed owners (up 1 point) reporting they added an average of 2.9 workers per firm over the past few months, and 13 percent reducing employment (up 1 points) an average of 1.9 workers (seasonally adjusted). The remaining 76 percent of owners made no net change in employment. Forty-one percent of the owners hired or tried to hire in the last three months and 33 percent (80 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Sixteen (16) percent of all owners reported they had hard-to-fill job openings, a drop of 1 point from the previous month. Job creation plans weakened substantially, falling 4 points and indicating that only (a net) one percent of owners plan to increase employment in the months to come. Not seasonally adjusted, seven percent of owners plan to increase employment at their firm (down 4 points), but 11 percent plan reductions (down 2 points).
- Credit Markets: Desire for new lines of credit is weak among small-business owners; 52 percent explicitly said they did not want a loan (65 percent including those who did not answer the question, who are assumed to be disinterested in borrowing). Six percent of owners surveyed reported that all their credit needs were not met, unchanged from November, and 29 percent reported all credit needs met. Only one percent of owners reported that financing was their top business problem, tied for the lowest reading in survey history. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, down 1 point from November. A net nine percent of small employers reported that loans are now “harder to get” when compared to their last attempt (asked of regular borrowers only), also unchanged from November. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 11 percent (more owners expect that it will be “harder” to arrange financing than easier), 1 point worse than in November.
- Capital Expenditures: Capital spending remained in “maintenance” mode—historically low—and plans to make capital outlays remained at recession levels. The frequency of reported capital outlays over the past six months fell 1 point to 52 percent. The percent of owners planning capital outlays in the next three to six months rose 1 point to 20 percent. Eight percent of owners characterized the current period as a good time to expand facilities (up 2 points), but the net percent of owners expecting better business conditions in six months was a net negative 35 percent, unchanged from November’s sharp decline. Not seasonally adjusted, 11 percent of owners expect an improvement in business conditions (up 2 points), and 45 percent expect deterioration (down 4 points). A net negative 2 percent of all owners expect improved real sales volumes, up 3 points. Overall, there was no sign that capital spending might be returning to levels more consistent with past recovery periods.