posted on 10 February 2015
Econintersect: The National Federation of Independent Business (NFIB)'s optimism index slid from 100.4 to 97.9. The market was expecting the index between 100.0 to 105.0 with consensus at 101.0. The decline was attributed to less optimism about sales growth and business conditions.
NFIB chief economist Bill Dunkelberg states:
Some other highlights of this Optimism Index include:
Owner Optimism. November and December readings were very strong (relatively), possibly post-election euphoria or a response to the improved growth in the second and third quarters last year. The November gain of 22 percentage points was accounted for by just two components: expected business conditions and expected gains in real sales. December was different, offering a more significant gain of 25 percentage points produced by 8 of the 10 components, half of which was in hiring and spending. January's decline resembled a reversal of November's gains, as most of the loss was in the expectations variables, not the spending and hiring plans. So, owners are less optimistic about sales growth and business conditions, but plan to keep creating jobs and spending on inventory and equipment at the best levels seen in the expansion. Reports of higher compensation were unchanged from December's solid reading of 25 percent, although plans to raise worker comp eased a bit. No inflation pressure from compensation yet, a net 3 percent of the owners reported raising average selling prices. Taxes and regulatory interference head the list of important problems for small business owners. Inflation risk and credit availability and cost are at the bottom of the list of concerns. Private markets have given the economy a substantial tax cut ($110 billion if gas is $1 lower per gallon for a year), something that the government will not do. In 2008, high oil prices stacked up money in the bank accounts of foreign producers. The next rise in oil prices will enrich U.S. producers, supporting capital spending and hiring.
Labor Markets. The percent of owners reporting job creation fell 4 percentage points to a net 5 percent of owners, still a solid number. December was just "hot" for some reason. The percent of owners cutting jobs remained historically low, so initial claims for unemployment have wobbled around the 300,000 mark. Overall, the average increase in workers per firm was 0.16 workers per firm, down a bit from December's strong reading of 0.2. Thirteen percent report increasing employment an average of 3.1 workers while 8 percent reduced their workforce by an average of 3.2 workers Forty-eight percent reported hiring or trying to hire (down 6 points), but 42 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, unchanged. Twenty-six percent of all owners reported job openings they could not fill in the current period, up 1 point and a very solid reading. The net percent of owners planning to create new jobs (hire more than the let go) gave up 1 point from December's excellent reading, providing evidence that the December number was not a fluke. A net 14 percent planning to create new jobs is a strong reading. With weaker top line sales for large firms due to the strong dollar and lower exports, employment gains may be shifting to the small business sector. The first "guess" at Q4 GDP growth was 2.6 percent. These first readings have been so far off the mark that the BEA should consider abandoning the preliminary reading and just wait until more of the data are in, my opinion. But, the markets like to have numbers to bet on. How many really look at the revisions to the payroll data reports? We build models using revised "true" data and try to forecast BEA and BLS first guesses. Maybe we should build models predicting the first guess using first reported data, not final figures. It appears that the economy is still trudging ahead, so job growth will continue to plod forward. The IRS is looking for 9,200 more workers to enforce Obamacare, workers who will produce nothing of value, just get paid by private sector workers who pay the taxes.
Sales. After surging in December, the net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months retreated 5 points, falling to a net negative 3 percent. Thirteen percent cited weak sales as their top business problem, up 2 points. Consumers really did start to show up, but apparently have slowed their spending in the past few months. Expected real sales volumes posted a 4 point decline, falling to a net 16 percent of owners expecting gains, still a decent reading. Sales prospects are still looking reasonably good to owners. Capital Spending. Fifty-nine percent reported outlays, down 1 point from December but the second strongest reading since the fourth quarter of 2007. Of those making expenditures, 41 percent reported spending on new equipment (down 1 point), 27 percent acquired vehicles (up 4 points), and 14 percent improved or expanded facilities (down 2 points). Five percent acquired new buildings or land for expansion (down 1 point) and 11 percent spent money for new fixtures and furniture (down 1 point). The percent of owners planning capital outlays in the next 3 to 6 months fell 3 points to 26, the second best reading for this expansion but still weak historically. Of the 47 percent of owners who said it was a bad time to expand (down 8 points since November), 19 percent (down 5 points) still blamed the political environment. The net percent of owners expecting better business conditions in six months dropped 12 points to a net 0 percent, wiping out the euphoria of November and December. A net 16 percent of all owners expect improved real sales volumes, down 4 points. Still good readings for this expansion, but historically not so hot.
Inventory. The pace of inventory change shifted to a positive position, with a net 2 percent of all owners reporting growth in inventories (seasonally adjusted). Inventory accumulation added nearly one percentage point to Q4 GDP growth. If these are not liquidated by stronger spending, this will depress growth in 2015 Q1. The net percent of owners viewing current inventory stocks as "too low" improved 2 points to a net negative 1 percent, historically a fairly "satisfied" reading. Not surprisingly, the net percent of owners planning to add to inventory stocks fell 3 points to a net 2 percent.
Inflation. Seasonally adjusted, the net percent of owners raising selling prices was a net 3 percent, a very "tame" reading. There are no inflation pressures coming from Main Street. Seasonally adjusted, a net 19 percent plan price hikes (down 3 points). A stronger economy will allow owners to actually realize their plans to raise prices, but so far, reports of actual price hikes suggest that markets will not yet support higher prices.
Earnings and Wages. Earnings trends worsened by 4 percentage points, reaching a net negative 19 percent (net percent reporting quarter to quarter earnings trending higher or lower). Labor costs continue to put pressure on the bottom line but energy prices are down a lot. That helps, but it is clear that firms are not yet able to pass their cost increases, primarily compensation, on to customers through higher prices. Two percent reported reduced worker compensation and 25 percent reported raising compensation, yielding a seasonally adjustednet 25 percent reporting higher compensation, unchanged from December. This is the strongest reading since January, 2008, the employment peak in the last expansion. A seasonally adjusted net 12 percent plan to raise compensation in the coming months (down 5 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations including the healthcare law. The poor performance of wage and salary data suggest that a lot of the gain in compensation is in benefits, not take home pay.
Credit Markets. Four percent of owners reported that all their credit needs were not met, holding at the historic low. Thirty-two percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem (1 point above the record low) compared to 21 percent citing taxes, 22 percent citing regulations and red tape and 13 percent citing weak sales. Eleven percent complained about the availability of qualified labor. Thirty-three percent of all owners reported borrowing on a regular basis, unchanged from December. The average rate paid on short maturity loans increased 20 basis points to 5.3 percent. Loan demand remained historically weak. The improved optimism and plans to hire and spend have not triggered an increase in owners' willingness to borrow and make a bet on the future. The net percent of owners expecting credit conditions to ease in the coming months was negative 5 percent, unchanged from December. Interest rates are low, prospects for putting borrowed money profitably to work seem to be improving but loan demand remains weak among small business owners. The Federal Reserve did all it could to improve the markets' view of existing cash flows (creating record high financial asset prices) but did little to contribute to better cash flows for most of America's firms.
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