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posted on 10 February 2015

January 2015 Small Business Optimism Slides Marginally

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:

November and December readings were very strong, possibly from post-election euphoria. January's decline was mostly due to owners being less optimistic about sales growth and business conditions, not spending and hiring plans. Even though there is a decline in optimism, the small business sector is operating in a somewhat normal zone. The increase in the percent of owners reporting hard to fill job openings is good news.

Report Overview:

In spite of the rather poor state of government economic policy, the private sector is managing to push ahead. GDP growth in Q4 was initially reported at 2.6 percent, revisions seem to be all positive these days. The data collection is running behind the economy. The revisions to November and December jobs numbers were absurdly large. Why investors pay attention is a mystery, the market just likes to bet on something.

The acceleration in growth follows the Federal Reserve's termination of the quantitative easing buying sprees. The Fed has taken interest rates down far enough to be more than attractive, but growth prospects (cash flow, profits) are only mediocre. Money isn't cheap if it can't be deployed profitably. Buying a trillion dollars of bonds doesn't produce jobs, the Fed has proved that. And the "wealth effect" from higher stock and bond prices did little to move the economy. Long term rates on Treasury securities will remain low as long as the Fed continues to hoard trillions of dollars in Treasury bonds and the deficit remains low (fewer bonds issued by the Treasury). There is a strong demand for low risk and risk free assets. Treasuries are the best, and so demand for them will keep interest rates low.

While the Administration wants to raise taxes and make it harder to exploit our energy assets (no Keystone, attempts to take Alaska out of the energy business), the private sector has pushed the economy forward, even delivering a nice reduction in energy costs. If gas is $1 lower in cost for a year, the improvement to disposable income is over $100 billion. However, the rapid decline in oil prices will create a lot of instability in employment and capital spending as drilling is down substantially in the U.S. And countries depending on oil revenue to run their governments are in serious trouble.

The average work week in manufacturing is over 40 hours now. Small manufacturers continue to do well with strong job creation plans and plentiful job openings. Apparently the IRS wants to be a job creator as well, asking for over 9,000 new positions in the budget to enforce Obamacare regulations. Their work will count as additional GDP, more workers working on taking something rather than producing a useful service or product. Overall, job creation plans were solid across the board, but especially in Construction, Professional Services, and Manufacturing with the help of strong car sales including the bestselling luxury car defined as $50,000 or higher in price, Ford's F150 truck.

Currently, it appears that the level of cooperation between Congress and the President remains low, so prospects of addressing the top issues for small business owners are not good. The U.S. is about the only functioning major economy, so it's good to be here even if prospects aren't as rosy as they could be with a "normalization" of monetary, fiscal and regulatory policies. The small business sector is contributing more to growth now, but still far below its potential. Policy remains a growth deterrent.

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.

Steven Hansen

source: NFIB

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