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posted on 14 April 2015

March 2015 Small Business Optimism Declined. All Ten Components of this Index Weakened

Econintersect: The National Federation of Independent Business (NFIB)'s optimism index fell from 98.0 to 95.2. The market was expecting the index between 97.0 to 95.2 with consensus at 98.2. Small business optimism is now at the lowest reading since June of last year.

NFIB chief economist Bill Dunkelberg states:

It is no surprise that optimism is muted and owners' expectations about the future are less than exuberant. Small business owners are not encouraged to expand their businesses when consumer spending is down, US trading partners are weakening and the government continues to try and micromanage the private sector with red tape and regulations.

Overall the economy will keep moving forward, but more like a turtle than a hare. Bad weather was certainly depressing and Washington politics remains focused on issues that have little bearing on the current economy."

Report Commentary:

First quarter growth is looking quite weak, due in part to weather (reduced shopping, construction etc.), the sharp decline in energy prices (lower employment and capital investment), weakness among our trading partners (lower exports) and dock strikes in the western part of the country. It is surprising that job markets have looked as good as they have given that GDP growth continued to slow from Q4 2014 rates.

The Federal Reserve did all it could to improve the markets' view of existing cash flows by lowering interest rates and supporting asset prices but did little to contribute to better cash flows for most of America's firms. The Federal Reserve and other central banks are hoarding risk free assets while the demand for these assets is rising. This keeps long term interest rates artificially low and creates longer term financial problems (like how to fund future pension liabilities) while denying savers a decent return on their savings. Thinking that their policies significantly impact the real economy,in spite of evidence to the contrary, the Fed persists in holding rates down and is probably not inclined to raise rates until GDP and employment growth rates pick up substantially. The fact that the Fed doesn't raise rates signals that they don't expect the economy to improve.

Meanwhile, the government continues to extend its control over the private sector, taking actions to restrict the growth in the energy sector, promulgating policies to support union growth in the small business sector, supporting climate change policies that will crush economic growth, unleashing the EPA to regulate every aspect of business activity and ignoring the issues that are important to small business growth such as tax reform and the regulatory avalanche that diverts the use of capital and owner time to unproductive activities.

So it is no surprise that optimism is muted and that owners' expectations about the future are less than exuberant. Government policies increasingly impinge on the private sector, diverting resources to unproductive uses like 9,000 IRS employees to exact ACA penalties on taxpayers. When new business owners were asked to characterize difficulties encountered and whether or not they were more difficult or less difficult than expected, 60 percent said that government regulations and red tape were much worse than expected, far more than any other factor. That survey was taken in 1990 - it has only worsened.

Some other highlights of this Optimism Index include:

Owner Optimism. The Small Business Optimism Index fell 2.8 points to 95.2, declining in sympathy with the rather weak stream of reports on the economy. Bad weather was certainly depressing, for both shoppers and the construction industry. All 10 Index components declined, contributing to the 31 point decline in net positive responses. The only good news is that the 10 Index components didn't fall further, not much to hang on to. Consumer spending has not shown much strength and the saving rate has increased. Not a recession scenario overall for sure, but there is not much growth energy in the economy, especially with the energy boom deflating a bit.

Labor Markets. The percent of owners reporting an increase in employment fell 1 percentage points to a net 4 percent of owners, a solid number. The percent of owners cutting jobs rose 3 points to 11 percent while the percent increasing employment gained 2 points to 15 percent. Overall, the average increase in workers per firm was 0.16 workers per firm, unchanged from January's solid reading. Those increasing employment added an average of 3.4 workers while those reducing their workforce cut an average of 2.9 positions. Fifty-three percent reported hiring or trying to hire (up 5 points), but 47 percent (89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twelve percent reported using temporary workers, down 2 points. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading since April 2006. Fourteen percent cited the availability of qualified labor as their top business problem, the highest since September 2007. A net 12 percent planning to create new jobs, down 2 points but a solid reading. GDP growth in 2014 Q4 was revised down to 2.2 from the initial estimate of 2.6 percent. This is a substantial slowdown from the mid-2014 pace. Consumer spending was still fairly solid in Q4 but has shown little strength so far this year. Even so, the labor market indicators are showing very solid strength. The job openings figure is one of the highest in 40 years and this suggests that labor markets are tightening and that there will be more pressure on compensation in the coming months. The monthly BLS employment report has been significantly revised each month recently and the revisions have been positive. But winter east of the Mississippi has not been conducive to growth and increased employment. All this considered, the NFIB data correctly anticiapted solid job growth, just short of the 300,000 average of the past few months, and a lower unemployment rate based on the surge in reports of hard-to-fill job openings.

Inventory and Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 3 points, to a net negative 3 percent. Certainly consumer spending has not shown much energy in the past few months. Eleven percent cited weak sales as their top business problem, down 1 point. Expected real sales volumes posted a 2 point decline, falling to a net 13 percent of owners expecting gains, after a 5 point decline in January and February. Sales prospects are still looking reasonably good to owners, just not as hot as in the fourth quarter last year. After 4 months of positive inventory investment, the pace of inventory investment reversed direction, with a net negative 4 percent of all owners reporting growth in inventories (seasonally adjusted). The net percent of owners viewing current inventory stocks as "too low" deteriorated 3 points to a net negative 5 percent, indicating that inventories are excessive when compared to expected sales volumes. The net percent of owners planning to add to inventory stocks fell 3 points to 1 percent, positive, but not a large force behind inventory investment in Q2.

Capital Spending. Fifty-eight percent reported outlays, down 2 points. Spending has not caught fire in spite of historically low interest rates. There is too much uncertainty and expected growth is too soft. Of those making expenditures, 40 percent reported spending on new equipment (down 3 points), 24 percent acquired vehicles (down 1 point), and 14 percent improved or expanded facilities (down 2 points). Eight percent acquired new buildings or land for expansion (unchanged) and 10 percent spent money for new fixtures and furniture (down 2 points). The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 24 percent, not a strong reading historically. Of the 42 percent of owners who said it was a bad time to expand (down 1 point), 21 percent (down 2 points) still blamed the political environment.

Inflation. Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, a very "tame" reading. There are no inflation pressures coming from Main Street. Seasonally adjusted, a net 15 percent plan price hikes (down 4 points). The economy has grown too slowly to support widespread price hikes and although compensation hikes are more frequently reported, energy cost savings are cushioning bottom lines.

Earnings and Wages. Earnings trends deteriorated 3 points, falling to a net negative 22 percent. Reports of increased labor compensation rose 2 percentage points to a net 22 percent of all owners. Labor costs continue to put pressure on the bottom line but energy prices are down a lot. A seasonally adjusted net 13 percent plan to raise compensation in the coming months (down 1 point). 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.

Credit Markets. Five percent of owners reported that all their credit needs were not met, up 2 points but historically low. Thirty-five percent reported all credit needs met, and 48 percent explicitly said they did not want a loan. For most of the recession, record numbers of firms have been on the "credit sidelines", seeing no good reason to borrow. Only 3 percent reported that financing was their top business problem. Thirty-two percent of all owners reported borrowing on a regular basis, up 2 points. The average rate paid on short maturity loans rose 60 basis points to 5.7 percent. Loan demand remained historically weak. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, a 2 point deterioration. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending.

Steven Hansen

source: NFIB

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