Econintersect: The National Federation of Independent Business (NFIB)'s June 2013 monthly optimism index declined marginally from 99.4 to 93.5. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
After two months of incremental but solid gains, the Index gave up in June. This appears par for the course, given that there is no reason for small employers to be more optimistic and lots of things to worry about.
Washington remains bogged down in scandals and confidence in government’s ability to deal with our fundamental problems remains low. Economic growth was revised was revised down for the first quarter of the year and the outlook for the second quarter is not looking good. Nothing cheers up a small-business owner more than a customer, and they remain scarce and cautious while consumer spending remains weak and more owners are reporting negative sales trends than positive ones. It certainly doesn’t help that the endless stream of delays and capitulations of certain provisions of the healthcare law adds to the uncertainty felt by owners. Until growth returns to the small-business half of the economy, it will be hard to generate meaningful economic growth and job creation.
The top business problems for small-business owners in June were taxes and regulations and red tape, with 20 percent of those surveyed ranking each as their No. 1 problem. Another 18 percent of owners cited weak sales as their top problem, but only 2 percent reported that financing was a major concern.
The revision of first quarter GDP growth to an anemic 1.8% at an annual rate confirms that the economy is growing at a very slow pace, not enough to produce many new jobs. The largest contributor to the negative revision was consumer spending, in particular to spending on services, which account for about 70% of consumer spending. This sector is very labor intensive and a revival of spending there would certainly improve job creation. Housing is getting better but running into some supply side constraints. Nearly half the builders complain that they are having trouble assembling work crews to build new houses while new home sales are pressing against supply. House prices are rising at double digit rates.
In the meantime, uncertainty reigns supreme, who knows what labor will cost or when or what firm size will have to comply with which rules – Health and Human Services is still writing them. The President’s delay for compliance among those with 50 employees or more is a political move, fearing the bad press that might occur prior to elections from the chaos produced by mandatory compliance. It is clear that the government is not prepared to implement this. Really, a group of people, most with little or no private sector experience, decided to restructure 15% of the Gross Domestic Product (GDP). This is what we expected, a rolling disaster – exemptions, special deals, delays, confusion, contradictory regulations. It’s a bad situation in Washington, scandals, no budget deals, no dealing with the big problems, our own government agencies taking advantage of us, Congressional law being suspended by the President, a flood of executive orders, the threat of higher energy costs (the attack on coal). Not a good time to bet on the future by hiring lots of workers with uncertain cost. The NFIB June survey confirms that.
The economy remains “bifurcated”, with the big firms producing most of the GDP growth with little help from small business. That balance is shifting, but unfortunately because larger firms are losing ground, not because small business is growing faster. Housing and energy are helping, and that does involve a lot of small businesses but the rout in housing was so severe that there are now supply constraints developing in new home construction due to lost capacity that cannot be easily reconstituted. Home prices are now increasing at double digit rates. Consumer net worth is allegedly doing well due to stock prices and house prices rising. But the quantity of items held, real wealth (houses, cars, fractions of a company owned), is not increasing that fast, just the prices. Been there, done that.
Some other highlights of June’s Optimism Index include:
- Job Creation. Small-business owners were not able to contribute to job growth again in June, with the average increase in employment coming in at a negative 0.09 workers per firm, essentially zero. While 360,000 new part-time jobs were added, about 240,000 full-time jobs disappeared.
- Hard to Fill Job Openings. Nineteen (19) percent of all owners surveyed reported job openings they could not fill in the current period (unchanged). Twelve (12) percent of owners reported using temporary workers, little changed over the past 10 years. The health care law provides incentives to increase the use of temporary and part-time workers, but this indicator has not registered a trend toward the use of more temps.
- Sales. The net percent of all owners* reporting higher nominal sales in the past three months compared to the prior three months gave up 4 points, falling to a negative 8 percent. The net percent of owners expecting higher real sales volumes lost 3 points, falling to 5 percent of all owners. The poor expectations do not anticipate new employment or new orders for inventories.
- Earnings and Wages. Reports of positive earnings trends deteriorated 1 point in June to a negative 23 percent. Four percent of owners reported reduced worker compensation and 19 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation (down 2 points). A net 6 percent of those surveyed plan to raise compensation in the coming months, down 3 points.
- Credit Markets. Credit continues to be a non-issue for small employers, five percent of whom say that all their credit needs were not met in June, unchanged from May. Twenty-nine (29) percent of owners surveyed reported all credit needs met, and 53 percent explicitly said they did not want a loan (67 percent including those who did not answer the question, presumably uninterested in borrowing).
- Capital Outlays. In June, the frequency of reported capital outlays over the past six months fell 1 point to 56 percent, 9 points below the average spending rate through 2007. The percent of owners planning capital outlays in the next three to six months was unchanged at 23 percent. The frequency of expenditures remained at the high end of recession-level readings, but there is no surge in capital spending on the horizon.
- Good Time to Expand. In June, only Seven percent characterized the current period as a good time to expand facilities (down 1 point). The net percent of owners expecting better business conditions in six months was a net negative 4 percent, a 1 point improvement.
- Inventories. The pace of inventory reduction continued in June, with a net negative 7 percent of all owners reporting growth in inventories, unchanged from May. For all firms, a net negative 2 percent (down 3 points) reported stocks too low, a sharp deterioration from May and consistent with weak spending which produces a buildup in stocks. Plans to add to inventories declined sharply; the net percent of owners planning to add to inventories fell 4 points to a negative 1 percent of all firms.
- Inflation. Twelve (12) percent of the NFIB owners surveyed reported reducing their average selling prices in the past three months (down 4 points), and 19 percent reported price increases (unchanged). The net percent of owners raising selling prices was 8 percent, up 6 points. As for prospective price increases, 19 percent plan on raising average prices in the next few months (up 2 point), and 3 percent plan reductions (unchanged). A net 18 percent plan price hikes, up 3 points.