posted on 12 April 2016
from the National Federation of Independent Business
The Index of Small Business Optimism fell 0.3 points from February, falling to 92.6. Statistically, no change. Four of the 10 Index components posted a gain, six posted small declines, the biggest gain was in Expected Business Conditions, a 4 point improvement to a still very negative number. The market was expecting the index between 93.5 to 93.9 with consensus at 93.6 - versus the actual at 92.6.
NFIB chief economist Bill Dunkelberg states:
Some other highlights of this Optimism Index include:
Optimism Index. For a broader perspective, the Index has turned decidedly "south" over the last 15 months falling from a reading of 100 in December 2014 to 92.8. A "chartist" looking at the data historically might conclude that the Index has clearly hit a top and is flashing a recession signal. The April survey will decide whether or not the alarm should be rung. This month's change was not statistically significant, just not in a positive direction. Owners remain very pessimistic about the economy, a view unfortunately reinforced by Fed Chair Yellen's back peddling on the timing of the next rate hike. She seems to be afraid of something, and this only adds to uncertainty on Main Street. Is the real economy so fragile that a 25 basis point increase will sink it, or is she more concerned about financial markets than the real economy? Stocks did applaud her walk back.
Labor Markets. Reported job creation improved in March, with the average employment change per firm rising to an average gain in employment of 0.02 workers per firm, not much, but positive. Thirteen percent (up 2 points) reported increasing employment an average of 2.2 workers per firm while 12 percent (down 1 point) reported reducing employment an average of 4.3 workers per firm. The gain is positive, but small, suggesting employment gains will continue to be modest but sufficient to keep the unemployment rate steady. Forty-eight percent reported hiring or trying to hire (down 1 point), but 41 percent reported few or no qualified applicants for the positions they were trying to fill. A lack of social skills, appearance, and attitude are deficiencies that disqualify the applicant as often as a lack of specifically needed job skills or a poor work history. No formal training is needed to correct these deficiencies, just a solid desire to get a job. Most of these job openings do not require a college education. Twelve percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem.
Inventory and Sales. The net percent of owners reporting inventory increases was unchanged at a net negative 3 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as "too low" deteriorated 3 points a net negative 5 percent. The net percent of owners planning to add to inventory declined a point to a net negative 2 percent. These weak inventory investment readings are consistent with the rather dismal view owners have about future sales and economic progress. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months worsened by 2 points, falling to a net negative 8 percent. Thirteen percent cited weak sales as their top business problem, up 2 points. Overall, this is not a strong sales picture. Expected real sales volumes posted only a 1 point gain, rising to a seasonally adjusted net 1 percent of owners expecting gains, a weak showing. This is well below the average 14 point reading in the first three months of 2015. With consumer sentiment falling (University of Michigan), this is not descriptive of an environment conducive to increased capital spending, inventory investment or employment.
Capital Spending. Fifty-nine percent reported capital outlays, up 1 point. Of those making expenditures, 43 percent reported spending on new equipment (up 3 points), 24 percent acquired vehicles (unchanged), and 14 percent improved or expanded facilities (down 2 points). Eight percent acquired new buildings or land for expansion (up 3 points) and 12 percent spent money for new fixtures and furniture (unchanged). Overall, capital spending reports were more frequent but there was little new strength in spending. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 25 percent, restoring the January reading. Of the 51 percent of owners who said it was not a good time to expand (down 4 points), 27 percent (up 6 points) blamed the political environment, second only to weak sales/bad economy (61 percent) as a reason for not expanding. Seasonally adjusted, the net percent expecting better business conditions improved 4 percentage points to a net negative 17 percent, after falling 12 points in the prior 3 months. The seasonally adjusted net percent expecting higher real sales was 1 percent of all owners, not very strong. Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment.
Inflation. In spite of the Fed's best efforts to generate inflation (an event most citizens would not want), inflationary pressures remain dormant on Main Street. Seasonally adjusted, the net percent of owners raising selling prices was negative 4 percent, for the third month in a row. More evidence that the Fed's policies aimed at producing inflation are not working. Small business owners can respond quickly to changing economic conditions, with a net 30 percent reporting higher selling prices early in 2008 (with oil at $140), then falling 55 percentage points to a net negative 25 percent reporting higher selling prices early in 2009 as the economy plunged into recession. A recovery in spending is the only way to create inflation, with spending demands pressing against short run supply. Zero or negative interest rates are not the answer, creating fear and uncertainty among owners rather than stimulating spending. Twenty-two percent plan on raising average prices in the next few months (up 3 points) while only 4 percent plan reductions (up 1 point), far fewer than actually report reductions. Seasonally adjusted, a net 17 percent plan price hikes (up 3 points). Prospects for a resurgence of inflation are low, and that's a good thing (except for the Fed which is trying to create inflation).
Earnings and Wages. A sesonally adjusted net 22 percent of owners reported raising worker compensation, unchanged from February but down 5 points from the expansion high level reached in January. The net percent planning to increase compensation rose 4 points to a net 16 percent, a significant increase. With more firms cutting selling prices than raising them, customers are being spared picking up the cost of rising compensation. Earnings trends worsened 1 point to a negative 22 percent reporting quarter on quarter profit improvements. Far more owners are reporting profits lower quarter to quarter than higher. The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem was unchanged at 12 percent. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees.
Credit Markets. Five percent of owners reported that all their borrowing needs were not satisfied, 3 points above the record low reached in September, 2015. Thirty-one percent reported all credit needs met (unchanged), and 53 percent explicitly said they did not want a loan. For most of the recovery, 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 13 percent citing poor sales. When credit is an issue, owners report it as illustrated by 37 percent reporting credit hard to get in the early 1980s compared to 5 percent today. Thirty-two percent of all owners reported borrowing on a regular basis, up 1 point but historically low. The average rate paid on short maturity loans fell 10 basis points to 5.2 percent. Loan demand remains historically weak, owners can't find many good reasons to borrow to invest when expectations for growth are not very positive. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, a point better than February. 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. With a quarter of all owners expecting business conditions to deteriorate, prospects for an improvement in loan demand are not particularly good.
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