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posted on 12 May 2015

April 2015 Small Business Optimism Strengthens but Remains Below Historical Average

Econintersect: The National Federation of Independent Business (NFIB)'s optimism index rose from 95.2 to 96.9. The market was expecting the index between 93.5 to 96.5 with consensus at 96.0. But this still leaves the Index below its historical average, oscillating between 95 and 98 but never breaking out except for December, when the Index just tipped past 100, only to fall again.

NFIB chief economist Bill Dunkelberg states:

Optimism may have seen a slight jump from last month's weak numbers, but there was not an especially large gain in any area except for an improvement in profit trends.Small business owners are still wary of the future, and that's most evident when we asked them about future sales.

Overall, the Index remains steady, but it is still a few points below the average and is showing no tendency to break out into a stronger pattern of economic growth. The little economic growth we do see is coming mostly from small businesses. Solid economic growth would require good performance from both big and small firms and that will likely be elusive this year.

Report Commentary:

So 2015 got off to a slow start with GDP increasing only 0.2 percent at first "guess". Trade data will apparently depress that further, perhaps producing a negative print, although more consumer spending may be found to keep growth above the 0 line. For a different perspective, GDP has grown 3 percent from the end of Q1 2014 to the end of Q1 2015, reflecting the volatility in growth that has occurred. Growth for the year will improve, but this was not a good start.

Job growth certainly hit a major speed bump. Weather, sure, but not in major GDP states like Texas, Florida, and California. The plunge in oil prices certainly adversely impacted job growth in the shale states. The West Coast dock strike? Maybe. But hard to figure out how many jobs might have been lost due to delays, certainly temporary losses that will be recovered when the goods flow. NFIB indicators have small business job growth fairly solid and the job openings numbers continue to signal a decline in the unemployment rate.

Financial markets remain on edge for signs of a Federal Reserve rate hike. A zero rate is looking even more absurd with 3 percent growth for the past 12 months. The Fed could argue that growth would have been worse if rates were higher, but more and more observers doubt the validity of that proposition. Low rates (and lower rates) won't drive more spending, everyone has their "cheap loan". Rather, it will require an improvement in economic and political prospects to induce economic agents to pick up the pace of hiring and investment spending. Meantime, investors (Gamblers? Are there any investors?) will continue to play the Fed's waiting/guessing game. The most recent murmurs from the Fed suggest they are recognizing the distortions in asset prices that buying trillions of dollars of risk-free assets (and hoarding them) have created.

The small business growth engine appears to be accounting for more of the real growth (what little there is) as economic activity among the larger firms fades. Solid growth (over 3 percent) will require good performances from both sectors and that will be elusive this year.

Some other highlights of this Optimism Index include:

Owner Optimism. The Small Business Optimism Index increased 1.7 points from March to 96.9, this in spite of a quarter of virtually no economic growth. Unfortunately, the Index remained below the January reading. Nine of the 10 Index components gained, only real sales expectations were weaker. But this still leaves the Index below its historical average, oscillating between 95 and 98 but never breaking out except for December, when the Index just tipped past 100, only to fall again.

Labor Markets. Small businesses posted another decent month of job creation. Those that hired were more aggressive than those reducing employment, producing an average increase of 0.14 workers per firm, continuing a string of solid readings for 2015. Fifty-three percent reported hiring or trying to hire (up 3 points), but 44 percent reported few or no qualified applicants for the positions they were trying to fill. Thirteen percent reported using temporary workers, up 3 points. Twenty-seven percent of all owners reported job openings they could not fill in the current period, up 3 points from March. A net 11 percent plan to create new jobs, up 1 point and a solid reading.

Inventory and Sales. The net percent of owners reporting inventory reductions rose 3 points to a net negative 1 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as "too low" improved 4 points to a net negative 1 percent. Apparently owners were meeting demand by drawing down stocks to match their mediocre expectations for improvements in sales. The net percent of owners planning to add to inventory rose 3 points to 4 percent, in sympathy with the more widespread reduction in stocks in the first quarter. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months fell 1 point to a net negative 4 percent. Although consumer spending was the only bright spot in the first quarter GDP report, it was nothing to write home about. Eleven percent cited weak sales as their top business problem, unchanged from March. Expected real sales volumes posted a 3 point decline, falling to a net 10 percent of owners expecting gains, after a 5 point decline in January and February and a 2 point decline in March. The 4 month downward trend does not bode well for economic growth in the small business sector. Overall, expectations are not showing a lot of strength.

Capital Spending. Sixty percent reported outlays, up 2 points in spite of the collapse of spending in energy and gas exploration. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 26 percent, not a strong reading historically but among the best in this expansion. Forty-four percent expected improved real sales volumes, 18 percent expected declines, leaving the net percent expecting higher real sales 3 points lower at a net 10 percent of all owners.

Inflation. Fourteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 1 point), and 18 percent reported price increases (down 1 point). Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, a very "tame" reading and unchanged from March. Seasonally adjusted, a net 17 percent plan price hikes (up 2 points). The economy has grown too slowly to support widespread price hikes.

Earnings and Wages. Earnings trends posted an unexpected 6 point gain, posting a reading of a net negative 16 percent. Reports of increased labor compensation rose 1 point to a net 23 percent of all owners. Labor costs continue to put pressure on the bottom line but fuel prices are down a lot. Two percent reported reduced worker compensation and 26 percent reported raising compensation. This should begin to show up in wage growth, although rising benefits offset potential increases in take-home pay. A seasonally adjusted net 14 percent plan to raise compensation in the coming months (up 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. Four percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically low. Thirty-one percent reported all credit needs met, and 53 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 2 percent reported that financing was their top business problem (down 1 point) compared to 22 percent citing taxes, 23 percent citing regulations and red tape and 11 percent citing weak sales. Thirty percent of all owners reported borrowing on a regular basis, down 2 points. The average rate paid on short maturity loans fell 70 basis points to 5.0 percent. Loan demand remained historically weak. The net percent of owners expecting credit conditions to ease in the coming months was a negative 4 percent, a 2 point improvement. 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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