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posted on 11 August 2015

July 2015 Small Business Optimism Index Increased 1.3 Points

Econintersect: The National Federation of Independent Business's (NFIB) optimism index improved from 94.1 to 95.4 - and still not above the 42 year average of 98.. The market was expecting the index between 93.9 to 96.0 with consensus at 95.0.

NFIB chief economist Bill Dunkelberg states:

A rollercoaster of optimism seems to be a familiar trend now. July has produced the most grudging of gains in the Index's history and is still not above the 42 year average of 98.0, and even further from the prerecession average of 99.5. This leaves current readings just over two points below the average and five points below the recovery's highest reading of 100.4 in December 2014.

Overall, the index clawed back a bit from the loss in June, but the best that can be said about it is that there was no further decline. Washington remains a mess and the basic message is that there is no second half surge in the wings waiting to take center stage.

Report Commentary:

GDP growth for the first quarter was finally revised to 0.6 percent after an excursion into negative territory. Second quarter growth is initially estimated at 2.3 percent, but with revisions to come. Domestically, the economy feels so flat - because it was, and still is. Exports have been strong in the recession, explaining a lot of things such as the performance of the large firms with profits at a record high share of GDP. The stock market is at record high levels, yet the output of USA, Inc. is less than impressive as shown below. Exports and foreign operations contributed to record high profits for the Large Firm division of USA, Inc. which has been hoarding cash and repurchasing shares, not investing in the real economy.

When comparing the Index against the real growth in domestic spending (GDP + imports - exports), they are clearly highly correlated. Appearing at first blush to be coincident, the Index is really a leading indicator as the surveys are taken in the first month of the quarter while government statistics are available a month after the end of the quarter. Thus, the January survey predicts the growth in domestic spending for the first quarter, and the first estimates from the government come well after the end of the quarter. And the latest data suggests some more strength in the domestic economy is coming, but not a whole lot.

With small business accounting for half of the private GDP, prospects for a strong second half of growth seem modest at best. The Large Firm division will be coasting, not growing or investing, and the Small Business division is not in the mood for rapid expansion and hiring. But even so, the economy grows driven by population growth and investment to cover depreciation and technological obsolescence, but not a lot more. Washington's plans to eliminate carbon and redistribute the wealth are growth depressants that offer little in the future beyond declining living standards and reduced opportunities. Congress appears to have little stomach to resist as every Congress runs deficits (Gingrich excepted), regardless of the political party in control. Unfortunately, politicians rely more and more on promises of subsidies or free stuff to get elected. This can't be extrapolated very far into the future before disasters are the most likely outcomes.

Some other highlights of this Optimism Index include:

Owner Optimism. The Small Business Optimism Index rose 1.3 points to 95.4. After giving up over 4 points in June, the Index clawed back 1.3 points in July, a familiar theme now, which has produced the most grudging gains in the Index's history - and still not above the 42 year average of 98. Expectations for business conditions and real sales gains accounted for half of the net gain in the Index components.

Labor Markets. Job creation was flat in July. On balance, owners added a net 0.05 workers per firm in recent months, better than June's -0.01 reading, but still close to the zero line. Fifty-seven percent reported hiring or trying to hire (up 5 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Sixteen percent reported using temporary workers, down 2 points. Twenty-five percent of all owners reported job openings they could not fill in the current period, up 1 point, but 4 points below the highest reading for this year. A net 12 percent plan to create new jobs, up 3 points reversing last month's loss.

Inventory and Sales. After an exciting surge in May, the net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months remained unchanged a net negative 6 percent. Ten percent cited weak sales as their top business problem, unchanged. Expected real sales volumes posted a 2 point gain, rising to a net 6 percent of owners expecting gains, a long way down from the 20 percent reading in December 2014. Overall, not a real positive outlook, but at least positive. The net percent of owners reporting inventory increases was unchanged a net 0 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as "too low" fell 2 points to a net negative 6 percent as weak sales made current stocks look excessive. The net percent of owners planning to add to inventory rose 4 points to a net 0 percent, a 4 point gain. Clearly small business owners don't plan on making much of a contribution to inventory accumulation. This will occur only if sales are even weaker than expected, not a positive way to "build inventory" for GDP.

Capital Spending. Sixty-one percent reported capital outlays, up 3 points on top of a 4 point gain in June. Overall, a nice pickup in the frequency of spending reports. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 24 percent, not a strong reading historically but among the better in this expansion. Owner expectations for the economy appear to be for a continuation of "under-performance". Investment plans remain historically sub-par, and owners have little interest in borrowing to support investment spending that promises little return.

Inflation. Thirteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 1 point), and 17 percent reported price increases (down 1 point). Seasonally adjusted, the net percent of owners raising selling prices was 5 percent, unchanged. There are no signs of inflation bubbling up on Main Street, should be good news, but maybe not for the Fed. Seventeen percent plan on raising average prices in the next few months (down 2 points). Two percent plan reductions (down 1 point), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 17 percent plan price hikes (down 1 point). Normally, low inflation is good news, but in our up-side-down world, the monetary authority wants more, not less of it.

Earnings and Wages. Earnings trends continued to deteriorate, posting a 2 point decline after a 10 point drop in June, falling to a negative 19 percent. Far more owners reporting profits lower quarter to quarter than higher. Reports of increased labor compensation rose 2 points to a net 23 percent of all owners (seasonally adjusted), still shy of the high of 25 percent for this year. Labor costs will continue to put pressure on the bottom line. Fuel prices are falling again, that helps, but an avalanche of higher regulatory costs is descending on the bottom line, federal, state and local. A seasonally adjusted net 15 percent plan to raise compensation in the coming months, the lowest reading since October, 2013 (up 4 points). Official reports of hourly wages suggest a chunk these gains are being absorbed by mandated "benefits", as little is getting through to take home pay.

Credit Markets. Four percent of owners reported that all their borrowing needs were not satisfied, historically low. Thirty-two percent reported all credit needs met, and 51 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 compared to 22 percent citing taxes, 21 percent citing regulations and red tape and 10 percent citing weak sales. The availability of qualified labor has replaced weak sales in third position, cited by 13 percent as the number one problem. In the Great Recession, no more than 5 percent cited credit availability and interest rates as their top problem compared to as high as 37 percent in the Volcker era. Thirty percent of all owners reported borrowing on a regular basis, down 1 point. The average rate paid on short maturity loans rose 20 basis points to 5.2 percent. Loan demand remains historically, owners can't find many good reasons to borrow to invest when expectations for growth are not very positive.

Steven Hansen

source: NFIB

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