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posted on 11 July 2017

June 2017 Small Business Optimism Fades in June

from the National Federation of Independent Business

Business owners' expectations for better business conditions tumbled in June along with plans to create jobs according to monthly Index of Small Business Optimism.

[editor's note: Market expectation from Bloomberg / Econoday was between 104.0 to 106.9 (consensus 104.5) versus the actual reading of 103.6.]

Said NFIB President and CEO Juanita Duggan:

Small business optimism dropped in response to the gridlock in the Senate over the healthcare reform bill. This happened in March, when optimism dipped after the House initially failed to repeal Obamacare. I hope every senator is paying attention, because small business owners are paying attention to them.

The Index fell 0.9 points to 103.6. Four of the 10 components posted a gain. Five declined, and one remained unchanged.

Expected better business conditions fell 6 points, a significant drop, while expected sales dropped 5 points. Job openings (-4) and job creation plans (-3) also declined in June. On the positive side, inventory satisfaction increased by 3 points, and plans to increase inventory rose by 3 points.

The Optimism Index shot up in November after the election based on the expectation that Congress and the President would reform taxes and healthcare.


Said NFIB Chief Economist Bill Dunkelberg:

The Index remains at a historically high level, but within the Index there are signs of trouble that should be a concern. Fewer business owners expect business conditions to improve, and fewer expect sales to improve.

The data is a mixed bag and the overall Index remains strong by historical standards. But there are signs that small business owners are less confident in the near-term future. That could be problematic if it continues.

As Washington fails to deliver on those two priorities small business optimism is dropping. Gridlock is driving down small business optimism, which will eventually drive down the economy.


Report Commentary:

First quarter GDP growth was finalized at 1.4 percent, a poor performance even after allowing for the peculiarities of GDP accounting. Consumer sentiment (University of Michigan) fell a few points to the lowest reading this year, apparently consumers are not finding the economy looking a lot better going forward. This, even though income grew at the fastest pace in two years. Much of this growth was due to dividends, which most consumers don't receive as part of their regular income. Spending grew very little and more small business owners reported sales declines quarter on quarter than reported gains. Second quarter growth will be much stronger than Q1, although still likely to be unimpressive. Consumer saving is up and auto sales were sluggish. Over the last 12 months, reports that the government is doing a good job peaked in January at 28 percent but is now at its lowest level since last June when it was 19 percent.

Lower energy prices are once again providing "dividends" to fuel users, consumers, and businesses alike. This ubiquitous benefit is not as powerful for the economy as it used to be because energy production is now significant in the U.S. economy. Historically, lower oil prices impacted producers outside of the U.S. economy but now affect our large and growing energy sector. Even so, energy related profits are dominating the profit picture among the Fortune 500 firms. Cheap oil looks to be a dependable source of reduced costs for the near term.

Headline unemployment rates of 4.3 percent (U-3) and 8.4 percent (U-6) are at recovery low levels. This excludes 4.5 million workers who say they want work but haven't looked in 12 months. Including them would take the U-6 rate up near 11 percent. Labor force participation rates for men and women remain below levels of the past few decades and "employed part-time for economic reasons" remains above levels typical of an expansion.

A continuation of the high levels of optimism in the small business sector will depend heavily on Congressional progress on the major issues for small business owners: healthcare, tax reform and regulatory relief. The Republicans have the votes to pass any bill that they agree on, but seem unable to agree on any bill, unable to find one that satisfies all the "opinion camps" in their membership. Because of this, by withholding all their votes on anything, the Democrats can block any bill which has only a few senators in opposition. More substantial progress is needed on these major issues if owner optimism is to be sustained and produce accelerated hiring and spending.

Some other highlights of this Optimism Index include:

Optimism Index Summary. The Index of Small Business Optimism fell 0.9 points to 103.6, but sustained the surge in optimism that started the day after the election. The Index peaked at 105.9 in January and has dropped 2.3 points to date, no doubt in part due to the mess in Washington, D.C. Four of the 10 Index components posted a gain, five declined, and one was unchanged. Progress is being made, but poorly communicated, and the biggest issues, healthcare and tax reform remain stuck in the bowels of Washington politics. Economic growth in the first half of this year will be about the same as we have experienced for the past three or four years, no real progress. There isn't much euphoria in the outlook for the second half of the year.

Labor Markets. Small business owners reported an adjusted average employment change per firm of negative 0.04 workers per firm over the past few months, basically zero. This followed one of the best readings since 2008 posted in May. Ten percent (down 5 points) reported increasing employment an average of 3.4 workers per firm and 11 percent (up 2 points) reported reducing employment an average of 2.1 workers per firm (seasonally adjusted). Fifty-four percent reported hiring or trying to hire (down 5 points), but 46 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 (down 4 points), third on the list of important problems behind taxes and regulatory costs. Thirty percent of all owners reported job openings they could not fill in the current period, down 4 points, but historically very high. A seasonally adjusted net 15 percent plan to create new jobs, down 3 points.

Credit Markets. Four percent of owners reported that all their borrowing needs were not satisfied, up 1 point and historically very low. Twenty-seven percent reported all credit needs met (down 4 points) and 54 percent explicitly said they did not want a loan, up 3 points. The reduction in the percent not having their credit needs satisfied moved to the "don't want a loan" category. Including those who did not answer the question, 69 percent of owners have no interest in borrowing, up 3 points. Only 1 percent reported that financing was their top business problem compared to 22 percent citing taxes, 19 percent citing regulations and red tape, and 15 percent the availability of qualified labor. Weak sales garnered 10 percent of the vote. Twenty-seven percent of all owners reported borrowing on a regular basis (down 1 point). Overall, loan demand remains historically weak, even with cheap money. The net percent of owners expecting credit conditions to ease in the coming months improved 1 point to a net negative 3 percent.

Sales and Inventories. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was a negative 4 percent, a 9-point decline from the 5 percent reading last month. Seasonally adjusted, the net percent of owners expecting higher real sales volumes lost 5 points, falling to a net 17 percent of owners. This is not promising for second half growth, as owners are less likely to hire, order new inventory or increase their capacity with new investment when sales prospects are not strong. The net percent of owners reporting inventory increases deteriorated 2 points to a net negative 3 percent (seasonally adjusted), the third consecutive month of inventory stock reductions. The net percent of owners viewing current inventory stocks as "too low" improved 3 points to a net negative 3 percent, as firms trimmed their excess inventory stocks over the past three months. The net percent of owners planning to add to inventory rose 3 points to a net 4 percent, the highest reading this year.

Capital Spending. Fifty-seven percent reported capital outlays, down 5 points. Of those making expenditures, 40 percent reported spending on new equipment (down 6 points), 21 percent acquired vehicles (down 5 points), and 13 percent improved or expanded facilities (down 2 points). Four percent acquired new buildings or land for expansion (down 2 points) and 11 percent spent money for new fixtures and furniture (down 3 points). Capital spending has faded from earlier in the year, but perhaps the decline will be reversed in the coming months as the percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 30 percent, the strongest reading since September 2007.

Compensation and Earnings. Reports of increased compensation fell 4 points to a net 24 percent. Owners complain at record rates of labor quality issues, with 85 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Rising compensation will attract workers back into the labor force but it is a slow process. The frequency of reported compensation gains (wages and benefits) has grown far faster than the percent of owners raising selling prices and passing these costs on to customers. The frequency of reports of improved profit trends was unchanged at a net negative 10 percent reporting quarter on quarter profit improvements, historically an excellent reading and one of the best readings in this expansion.

Inflation. The net percent of owners raising average selling prices posted a surprising 6 point decline in June, falling to 1 percent. Eleven percent of owners reported reducing their average selling prices in the past three months (up 2 points), and 14 percent reported price increases (down 5 points). Seasonally adjusted, a net 19 percent plan price hikes (down 2 points).

source: NFIB

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