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posted on 09 August 2016

July 2016 Small Business Optimism Shows Sluggish Small Business Growth

from the National Federation of Independent Business

The Index of Small Business Optimism rose one-tenth of a point in July to 94.6, a meager increase showing no real enthusiasm for expansion, expected sales, and making capital outlays.

At 94.6, the Index remains well below the 42-year average of 98. Four of the 10 Index components posted a gain, four declined, and two were unchanged. The outlook for business conditions in the next six months continued to improve, gaining 16 percentage points since January, but still more owners still expect conditions to be worse than expect improvement.


NFIB chief economist Bill Dunkelberg states:

Small business optimism was pretty much unchanged during the month of July, and small businesses continue to be in maintenance mode. Uncertainty is high, expectations for better business conditions are low, and future business investments look weak. Our data indicates that there is little hope for a surge in the small business sector anytime soon.


Report Commentary:

After seven years of "recovery" which hasn't turned out to be much of one, real GDP posted three quarters of growth averaging 1 percent, dragging down the average of 2.1 percent growth for the recovery period. Compare this to 4.5 percent for the 1983 recovery. At the tail end of this recovery, there are 5 million more food stamp recipients than at the start of the Obama administration. There are 10 million more people on Medicaid. The "work" requirement in the 1996 welfare reform legislation that worked well has been eliminated, perhaps explaining why so many owners with job openings for low skilled workers can't find qualified applicants, welfare competes with actually taking a job. If this is where the "recovery" ends, it will certainly be a sad performance.

Consumer sentiment went down (University of Michigan) but the most recent retail sales figures were promising, with better than 4 percent growth. Consumer spending is critically important to small businesses. Ford doesn't sell cars, small business owners do and sales have recently been at a very high pace. It appears that the consumer is totally responsible for second quarter growth and appears poised to keep spending in Q3. However there is little hope of a good growth year at this point, as the business sector does not seem anxious to do a lot of investment spending or hiring. Small business owners remain in "maintenance mode". A record high percentage of owners cited "the political climate" as the major reason for viewing the current period as a bad time to expand. The surge in consumer spending was met by drawing down inventories, taking a point off of GDP growth. A rebuild of inventories was not apparent in the NFIB numbers but if it happens, Q3 growth will get a boost. Overall, growth will likely resume its 2 percent pace.

Some other highlights of this Optimism Index include:

Optimism Index. The Index of Small Business Optimism increased 0.1 points to 94.6, still well below the 40 year average of 98. Four of the 10 Index components posted a gain, four declined and two were unchanged. GDP growth in the last three quarters has averaged 1 percent, not a recession but only matching the growth in the population. The outlook for business conditions six months from the current period continued to improve, gaining 16 percentage points since January but still in negative territory - more owners expecting deterioration than improvement. Only 8 percent (seasonally adjusted) view the current period as favorable for business expansion, the average for this recovery but well below the 17 percent average for 2000-2007.

Labor Markets. Reported job creation remained weak in July, with the seasonally adjusted average employment change per firm posting a decline of -0.03 workers per firm, although better than June's -0.17 reading. Fifty-three percent reported hiring or trying to hire (down 3 points), but 46 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem. This issue ranks third out of nine major issues listed. Twenty-six percent of all owners reported job openings they could not fill in the current period, down 3 points from, the highest reading in this recovery. Thirteen percent reported using temporary workers, up 1 point. A seasonally adjusted net 12 percent plan to create new jobs, up 1 point from June.

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 fell 4 percentage points to a net negative 8 percent. This series peaked in October 2014 at a negative 2 percent, with the exception of an unexpected and inconsistent reading of 2 percent in 2012. Twelve percent cited weak sales as their top business problem, up 1 point from June. Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 1 point to a net 1 percent of owners, a weak showing. Expectations for stronger real sales peaked in the quarterly surveys at a net 14 percent in January 2015, but have deteriorated substantially since the first quarter of 2015. The net percent of owners reporting inventory increases increased 1 point to a net negative 5 percent (seasonally adjusted), on balance still reducing inventories as the GDP figures confirmed. The net percent of owners viewing current inventory stocks as "too low" was unchanged at a net negative 4 percent, more owners still found stocks to be excessive rather than lean. The net percent of owners planning to add to inventory increased 3 points to a net 0 percent, not a strong picture.

Capital Spending. Fifty-nine percent reported capital outlays, up 2 points from June. The survey shows no strength in capital spending, consistent with reports from the Bureau of Economic Analysis on GDP. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 25 percent, a high reading in this expansion, but historically weak. The small business sector remains in "maintenance mode", spending will continue to stay in place, but not expand.

Inflation.Inflationary pressures remain dormant on Main Street. Seasonally adjusted, the net percent of owners raising selling prices fell 4 points from June to a negative 2 percent. In spite of the Federal Reserve's efforts, inflation on Main Street is M.I.A. Seasonally adjusted, a net 14 percent plan price hikes (down 2 points). Prospects for a resurgence of inflation are low, especially with gas prices on the decline again.

Earnings and Wages. A seasonally adjusted net 24 percent of owners reported raising worker compensation, up 2 points from June but 2 points below May. The net percent planning to increase compensation rose 1 point to a net 15 percent. Earnings trends worsened a point to a net negative 21 percent reporting quarter on quarter profit improvements. Gas prices are falling again, and once again providing a small cushion for the bottom line compared to past years. At the macroeconomic level, corporate profits are showing weakness as well.

Credit Markets. Three percent of owners reported that all their borrowing needs were not satisfied, 1 point above the record low reached in September 2015. Thirty percent reported all credit needs met (down 2 points), and 53 percent explicitly said they did not want a loan, up 6 points. Only 2 percent reported that financing was their top business problem compared to 20 percent citing taxes. Twenty-eight percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans rose 40 basis points to 5.3 percent. Loan demand remains historically weak, owners can't find many good reasons to borrow and invest. The net percent of owners expecting credit conditions to ease in the coming months was a negative 5 percent, one point better than June. 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.

source: NFIB

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