Econintersect: The National Federation of Independent Business (NFIB)'s April 2013 monthly optimism index improved 2.6 to 92.1 - just above the recovery average of 90.7. In April’s report, four Index components rose, two fell and six were unchanged.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
Small-business confidence saw an uptick this last month, but it was a ho hum, yawn, at-least-it-didn’t-go-down reading. The sub-par recovery persists for the small business sector.
Economic performance is contradictory—corporate profits are at record levels and the stock market hits new highs, yet GDP growth for the past six months has averaged about 1.5 percent and the unemployment rate is 7.5 percent. Nothing in the NFIB data suggests that the small business half of the economy is expanding other than by an amount driven by population growth and associated new business starts now in excess of terminations. The lack of leadership in Washington and the resulting uncertainty depresses consumers’ and business owners’ willingness to spend and invest, and make bets on the future.
The world is starting to look a bit strange in many respects. Stock markets are at record high levels and corporate profits a record share of GDP (nominal). Yet real GDP barely grew in 2012 Q4 and a sub-par 2.5% in 2013 Q1. Just how we get record profits but hardly produce more output and have prices hardly growing is a bit of a contradiction. The NFIB survey suggests that the small-business sector is not growing. New business starts appear to be slightly ahead of terminations, but both levels are historically low. The Federal Reserve has stopped worrying about inflation. (Historically, inflation was considered the #1 concern of the Fed.) The Vice-chair of the Fed has suggested that inflation will now be a tool used to impact employment rather than a target of policy. Although one can argue that without Quantitative Easing there would have been even less job growth, it does not appear that the massive QEs have had much of an impact on employment growth. The Fed is providing a trillion dollars’ worth of finance to the government, money that it does not have to tax from us or borrow from the private sector or the rest of the world. Debt is piling up and future servicing costs will be formidable. Meantime, interest income to consumers has declined half a trillion dollars over the past few years, that’s a huge loss of income and certainly impairs spending. Washington is always ready to help debtors but not savers.
Small-business owners remain quite pessimistic about the future and this has depressed spending and hiring. Capital spending is low which will eventually impact worker productivity as will the conversion of full-time workers to part-time workers induced by the health care law. Managing two part-time workers to do the work of one full-time worker too expensive to hire will add to inefficiency. Although better than the past few months, the percent expecting business conditions to be worse in 6 months exceed the percent expecting improvement by 15 percentage points. More now expect real sales to be higher than lower by 4 percentage points, better than the past 6 months in which the margin was negative, but very thin. Only 4% think it’s a good time to expand. In "normal" times, that would be a double digit figure. Owners are preparing for higher taxes and the full implementation of the health care law, both large negatives. Consumers agree, less than 10% think government is doing a “good” job, 47% firmly believe it is “bad”. More customers would trigger more hiring and inventory investment and capital spending, but consumers seem to be unwilling to cooperate. But, only 23% plan to make capital expenditures and as many firms plan to cut inventories as plan to add to them. This does not stimulate much growth.
Some other highlights of April’s Optimism Index include:
- Job Creation. April was another positive, albeit lackluster month for job creation. Small employers reported increasing employment an average of 0.14 workers per firm in April. This is a bit lower than March’s reading, but still the fifth positive sequential monthly gain. Job creation plans rose 6 points to a net six percent planning to increase total employment.
- Hard to Fill Job Openings. Forty-nine (49) percent of owners surveyed hired or tried to hire in the last three months and 38 percent (78 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.
- Sales. The net percent of all owners* reporting higher nominal sales in the first quarter of 2013 compared to the fourth quarter of 2012 rose 3 points to a negative four percent, the best reading in 10 months, although there are still more firms reporting declines than those reporting gains. Sales expectations improved 8 points from March to a net four percent.
- Earnings and Wages. Earnings trends have been on an upward trajectory but were unchanged in April, holding at a net negative 23 percent. Nineteen percent of small employers reported raising compensation and three percent reported reductions in worker compensation, yielding a net 15 percent reporting higher worker compensation (down 1 point from March). A net nine percent of owners plan to raise compensation in the coming months.
- Credit Markets. Thirty-one (31) percent of owners reported that all their credit needs were met; 50 percent explicitly said they did not want a loan (63 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only six percent of owners reported that all their credit needs were not met, down 1 point and only 2 points above the record low.
- Capital Outlays. The frequency of reported capital outlays over the past six months fell 1 point to 56 percent, after rising steadily, albeit by small increments, since January. The frequency of expenditures being made remain at the high end of recession-type readings, consistent with the lack of interest in expansion and the dim outlook for business conditions. The percent of owners planning capital outlays in the next three to six months fell 2 points, with a reported 23 percent planning to make future expenditures.
- Good Time to Expand. Only four percent of those surveyed characterized the current period as a good time to expand, unchanged from last month and historically a very weak number. Of those who said it was not a good time to expand, 62 percent cited “economic conditions” and 24 percent cited “the political climate.” The net percent of owners expecting better business conditions in six months was a net negative 15 percent, an increase of 13 points over April.
- The pace of inventory reduction continued, with a net negative six percent of all owners reporting growth in inventories. For all firms, a net negative 1 percent (unchanged) reported stocks too low, historically a good level of satisfaction with inventory stocks.
- Plans to increase inventories gained 5 points but rose only to a net zero percent of all firms.
- Inflation. Twenty percent of surveyed NFIB owners reported price increases (up 2 points) and 15 percent reported reducing their average selling prices in the past three months (down 2 points). The net percent of owners raising selling prices was three percent, up 4 points. Twenty-one (21) percent of owners plan to raise average prices in the next few months, and three percent plan reductions, both unchanged from March’s report