posted on 14 June 2016
from the National Federation of Independent Business
The Index of Small Business Optimism rose two tenths of a point in May to 93.8, a negligible increase showing no real enthusiasm for making capital outlays, increasing inventories, or expanding
Half of the gain came in the two labor market components, an encouraging development. The market was expecting the index between 92.2 to 94.0 with consensus at 93.5 - versus the actual at 93.8.
NFIB chief economist Bill Dunkelberg states:
Some other highlights of this Optimism Index include:
Optimism Index. The Index of Small Business Optimism increased 0.2 points to 93.8, positive but don't start writing home about it. Four of the 10 Index components posted a gain, four declined and two were unchanged. The entire gain in the Index was accounted for by a 5 point gain in Expected Business Conditions which remains 9 percentage points below last year's reading. The political climate continued to be the second most frequently cited reason (after weak sales) for why the current period is a bad time to expand. Although early signs of economic activity for Q2 are looking better, growth for Q1 was revised up to only 0.8 percent which is a very weak start for the year. Consumer spending looks like it might add some more energy with consumer sentiment improving a bit in May.
Labor Markets. Fifty-six percent reported hiring or trying to hire (up 3 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Hiring activity increased substantially, but apparently the "failure rate" also rose as more owners found it hard to identify qualified applicants. Thirteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, #4 on the Most Important Problem list. Twenty-seven percent of all owners reported job openings they could not fill in the current period, down 2 points, but historically strong. Fifteen percent reported using temporary workers, up 2 points from April, 5 points from March. Overall, it appears that labor markets are tightening. A seasonally adjusted net 12 percent plan to create new jobs, up 1 point from March.
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 deteriorated 2 percentage points to a net negative 8 percent, a poor reading and reflective of weaker consumer spending in Q1. Fourteen percent cited weak sales as their top business problem, up 3 points from April. Overall, this is not a strong sales picture. Seasonally adjusted, the next percent of owners expecting higher real sales volumes was unchanged at a net 1 percent of owners, a weak showing. This is well below the average 14 point reading in the first three months of 2015. The net percent of owners reporting inventory increases deteriorated 1 point to a net negative 6 percent (seasonally adjusted), a weak reading. The net percent of owners viewing current inventory stocks as "too low" improved a point to a net negative 4 percent. The net percent of owners planning to add to inventory decreased 1 point to a net negative 1 percent. These weak inventory investment readings are consistent with the rather poor performance of consumer spending in the first quarter, leaving owners with excessive stocks and no incentive to add to them.
Capital Spending. Fifty-eight percent reported capital outlays, down 2 points. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 23 percent. Seasonally adjusted, the net percent expecting better business conditions increased 5 percentage points to a net negative 13 percent. The seasonally adjusted net percent expecting higher real sales was unchanged at 1 percent of all owners, not very strong. Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment.
Inflation. Gas prices are up 15 percent so far this year as oil prices rebound from very low levels. However, this will not be sufficient to get the Fed's preferred inflation measure over the 2 percent goal they have set. Inflationary pressures remain dormant on Main Street. Seasonally adjusted, the net percent of owners raising selling prices was up 2 points from April to 1 percent, after five months in negative territory, three of them at a negative 4 percent. More evidence that the Fed's policies aimed at producing inflation are not working. Seasonally adjusted, a net 16 percent plan price hikes (unchanged). Prospects for a resurgence of inflation are low, and that's a good thing (contrary to Fed efforts to create inflation).
Earnings and Wages. A seasonally adjusted net 26 percent of owners reported raising worker compensation, up 2 points. The net percent planning to increase compensation was unchanged at a net 15 percent. The survey does not distinguish between changes in wages and changes in benefits, including health insurance. Overall, the percent of owners reporting that they raised worker compensation remains high for this recovery while the net percent of owners raising prices remains near zero, indicating that these costs are not being passed on to customers. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem rose a point to 13 percent, number 4 on the list of problems behind taxes, and regulations and red tape and weak sales. Earnings trends deteriorated a point to a net negative 20 percent reporting quarter on quarter profit improvements.
Credit Markets. Four percent of owners reported that all their borrowing needs were not satisfied, 2 points above the record low reached in September 2015. Thirtyone percent reported all credit needs met (unchanged), and 52 percent explicitly said they did not want a loan. Only 1 percent reported that financing was their top business problem compared to 23 percent citing taxes. Twenty-nine percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans fell 40 basis points to 5.3 percent. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, unchanged from April.
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