posted on 11 October 2016
from the National Federation of Independent Business
The net percent of small business owners who expect better business conditions in the next six months jumped 12 points last month,but that gain was erased by significantly weaker inventories and hard-to-fill job openings.
Market expectations (from Bloomberg / Econoday) was a reading between 94.4 to 95.6 (concensus 95.0) with the reported value at 94.1.
Expected business conditions over the next six months was the biggest mover in this month's survey, climbing out of negative territory back to zero with a 12-point gain.
NFIB chief economist Bill Dunkelberg states:
Some other highlights of this Optimism Index include:
Optimism Index. The Index of Small Business Optimism fell 0.3 points to 94.1, another monthly decline, and four points below the 40 year average of 98. Four of the 10 Index components posted a gain, six declined. There was a huge improvement in the outlook for business conditions, but rising only to a net 0 percent expecting improvement. Offsetting that gain were large losses in job openings, inventory satisfaction and plans for inventory investment. Many were hoping for some "juice" in economic activity after a very poor performance for the past 12 months. The presidential election is so divisive that it offers little promise of a bipartisan effort to deal with any of these important issues once a new management team is installed in Washington D.C. Fiscal policy, badly in need of an overhaul, will face similar challenges. The political impasse leaves owners with the prospect of slow growth, more uncertainty and little capital spending beyond "maintenance".
Labor Markets. Fifty-eight percent reported hiring or trying to hire (up 2 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Seventeen percent of owners cited the difficulty of finding qualified workers as their single most important business problem. This issue ranks second behind taxes but tied with the cost of regulation and red tape. Twenty-four percent of all owners reported job openings they could not fill in the current period, down 6 points from August when it reached the highest for this recovery. A seasonally adjusted net 10 percent plan to create new jobs, up 1 point from August.
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 improved 3 percentage points to a net negative 6 percent. Reports of stronger consumer spending in the government numbers did not improve reports of sales gains. Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 5 points to a net 4 percent of owners, a weak showing. With weak sales prospects, hiring and inventory investment will be weak. The net percent of owners reporting inventory gains fell 4 points to a net negative 4 percent (seasonally adjusted). Selling to customers out of excess inventory stocks does not add to GDP. The net percent of owners viewing current inventory stocks as "too low" deteriorated 5 points to a net negative 7 percent, indicating weak demand for new inventory spending. The net percent of owners planning to add to inventory fell 8 points to a net negative 7 percent, not a strong picture.
Capital Spending. Fifty-five percent reported capital outlays, down 2 points from August following a 2 point decline in July. The percentage of owners making an outlay peaked in July 2015 and most recently in January 2016 at 61 percent, but has faded since. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 27 percent, the second highest reading in the recovery, but historically weak. The small business sector remains in "maintenance mode". Seasonally adjusted, the net percent expecting better business conditions gained 12 percentage points to a net 0 percent, an improvement, but to a still poor reading. The seasonally adjusted net percent expecting higher real sales rose 5 points to 4 percent of all owners, a very weak showing. Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment as prospects for sales and profits are poor.
Inflation.The lack of "inflation" on Main Street continues to contribute to the Federal Reserve's frustration. The net percent of owners raising average selling prices was a net negative 1 percent (down 4 points), this in contrast to a net 70 percent raising average prices in the 1970s. Clearly the small business sector can produce "inflation". Fourteen percent of owners reported reducing their average selling prices in the past three months (unchanged), and 12 percent reported price increases (down 4 points). Nineteen percent plan on raising average prices in the next few months (up 2 points) while only 3 percent plan reductions (down 1 point). Seasonally adjusted, a net 18 percent plan price hikes (up 3 points).
Earnings and Wages. A seasonally adjusted net 22 percent of owners reported raising worker compensation, down 2 points. The net percent planning to increase compensation was unchanged at 14 percent. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem rose 2 points to 17 percent, second on the list of problems behind taxes, and tied with the cost of regulations and red tape. Earnings trends improved 3 points to a net negative 20 percent reporting quarter on quarter profit improvements. The inability of firms to raise prices limits the extent to which firms can raise worker compensation as they face shortages of some types of labor.
Credit Markets. Six percent of owners reported that all their borrowing needs were not satisfied, up 2 points from August. Only 1 percent reported that financing was their top business problem. Thirty-two percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans rose 100 basis points to 6.2 percent. Overall, loan demand remains historically weak, owners can't find many good reasons to borrow and invest, even with abundantly cheap money. The net percent of owners expecting credit conditions to ease in the coming months was a negative 7 percent, 2 points worse than August.
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