posted on 12 July 2016
from the National Federation of Independent Business
The Index of Small Business Optimism rose seven-tenths of a point in June to 94.5, a negligible increase showing no real enthusiasm for making capital outlays, increasing inventories, or expanding.
At 94.5, the Index remains well below the 42-year average of 98. Four of the 10 Index components posted a gain, three declined, and three were unchanged. The biggest increase was Expected Business Conditions, which rose four points, a good sign, but more owners still expect conditions to be worse than expect improvement. Owners are still reporting that they cannot find qualified workers and cite it as their third "Single Most Important Business Problem."
Job openings and capital spending plans both increased to "expansion" high readings, but remain historically low for a growth period. Weak capital spending remains one of the main causes for slow GDP growth. And the political climate continues to be the second most frequently cited reason for why owners think the current period is a bad time to expand.
Half of the gain came in the two labor market components, an encouraging development. The market was expecting the index between 93.0 to 94.1 with consensus at 94.0 - versus the actual at 94.5.
NFIB chief economist Bill Dunkelberg states:
Some other highlights of this Optimism Index include:
Optimism Index. The Index of Small Business Optimism increased 0.7 points to 94.5, still well below the 40 year average of 98, but the third monthly gain in a row, although the gains are very small. Four of the 10 Index components posted a gain, three declined and three were unchanged. The outlook for business conditions six months out continued to improve, although more owners still expect conditions to be worse than expect improvement. First quarter GDP growth was revised up again, to a sluggish 1.1 percent. Second quarter growth will likely be better, in the low 2 percent range. Small business owners appear to be on the same track they have followed for the past few years - maintenance mode, but not much growth. This w
Labor Markets. Fifty-six percent reported hiring or trying to hire (unchanged), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Fifteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem and the highest reading in this expansion. The issue ranks third out of nine possible issues listed. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 2 points, the highest reading in this expansion. Twelve percent reported using temporary workers, down 3 points, consistent with the overall decline in employment and hiring. A seasonally adjusted net 11 percent plan to create new jobs, down 1 point from May.
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 rose 4 percentage points to a net negative 4 percent, an improvement, but still negative. Eleven percent cited weak sales as their top business problem, down 3 points from May. Overall, trends have been improving, becoming less "negative", but not a sign of much strength. Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 1 point to a net 2 percent of owners, a weak showing. Expectations for stronger real sales peaked at a net 19 percent in December 2014 but have deteriorated substantially since the first quarter of 2015. The net percent of owners reporting inventory increases was unchanged at a net negative 6 percent (seasonally adjusted), a weak reading. The net percent of owners viewing current inventory stocks as "too low" was unchanged at a net negative 4 percent, more owners found stocks to be excessive rather than lean in light of sales expectations. The net percent of owners planning to add to inventory decreased 2 points to a net negative 3 percent. These weak inventory readings are consistent with the subpar growth reported in the economy.
Capital Spending. Fifty-seven percent reported capital outlays, down 1 point from May. The percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 26 percent, the third highest reading in this expansion (but historically weak). Seasonally adjusted, the net percent expecting better business conditions improved 4 percentage points to a net negative 9 percent. The seasonally adjusted net percent expecting higher real sales rose 1 point to 2 percent of all owners, not very strong. Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment.
Inflation. Inflationary pressures remain dormant on Main Street. Twelve percent of owners reported reducing their average selling prices in the past three months (down 1 point and down 6 points from March), and 16 percent reported price increases (down 1 point). Seasonally adjusted, the net percent of owners raising selling prices was up 1 point from May to 2 percent. This follows nearly half the year in negative territory, with more owners cutting prices than raising them. In spite of the Federal Reserve's efforts, inflation on Main Street is M.I.A. Seasonally adjusted, a net 16 percent plan price hikes (unchanged). Prospects for a resurgence of inflation are low, and that's a good thing for consumers.
Earnings and Wages. A seasonally adjusted net 22 percent of owners reported raising worker compensation, down 4 points. The net percent planning to increase compensation fell 1 point to a net 14 percent. The strongest reading in this expansion occurred in January with 27 percent reporting higher employee compensation. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem rose 2 points to 15 percent, number three on the list of problems behind taxes, and regulations and red tape. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees. Earnings trends were unchanged at a net negative 20 percent reporting quarter on quarter profit improvements. For the economy, profits fell 6 percent in Q1 and are expected to fall by several percentage points in Q2, as anticipated by the gap between the percent of NFIB owners raising compensation and the percent of owners raising selling prices and passing those costs along.
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-two percent reported all credit needs met (up 1 point). Only 2 percent reported that financing was their top business problem. Twentynine percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans rose 40 basis points to 5.7 percent. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, unchanged from May.
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