May 2012 Small Business Index Remains Weak and Essentially Unchanged

Econintersect: The NFIB’s May 2012 monthly optimism index fell 0.1 to 94.4:

• gains in six out of last eight months
  
• historically low and consistent with the sub-par performance of GDP and employment growth
• individual indicators were mixed.
  

NFIB reports usually contain blasts directed at Washington.

“In the last year, small-business optimism has limped along, and today the sector is no better off than it was just over a year ago,” said NFIB Chief Economist William Dunkelberg.

“The lack of progress is discouraging, producing no signs that economic activity will pick up this year at all. The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health-care costs, regulatory compliance costs, all of which are very uncertain. Most of this uncertainty is the result of what is happening—and not happening—in Washington. Investments in jobs or plant and equipment are not the priority while people are still bracing for the worst.”

The additional report commentary:

The Index did not go down by much, that’s the good news. The May reading is still at recession levels from an historical perspective, consistent with very anemic Gross Domestic Product (GDP) and employment growth. The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health care costs, regulatory compliance costs, all of which are very uncertain, meaning that owners cannot make reliable estimates of what will happen to these factors. Most of this uncertainty (owners can’t attach probabilities to outcomes or even decide which outcomes to consider) is coming out of Washington.

The amount of political manipulation and evasion (“green job” definitions to support government siphoning capital, AFL-CIO top legal eagle gets a recess appointment to the NLRB, a real confidence builder) to guide the spending of billions of taxpayer dollars is disturbing to owners. One in 4 owners who view the current period as a bad time to expand (60%) cite political uncertainty as the main reason, second only to concerns about a weak economy. Investing in jobs or plant and equipment will remain at “maintenance” level until this is resolved.

The Index averaged 100 from 1973 to the end of 2007, but has averaged 90 since then, over 5 years of below average performance. Over ten questions in the Index, net positive responses would have to be 100 points higher just to get back to the average. In a recovery, it should be posting above average readings.

Developments in Europe probably have their most damaging impact on the economy through adversely impacting uncertainty and expectations. A financial meltdown there will translate into less confidence in our ability to support the U.S. banking system even though direct exposure is not large. Capital flight from European asset investments will roil U.S. markets. There will be lots of financial news and speculation. On the real side, if Europe does slip into a broader and deeper slowdown, exports will be adversely impacted.

The April gains in the employment, sales and profits indicators did hold up pretty well in May, a comforting sign. Inflation is clearly not a problem; reported interest costs are a tad lower. But expectations for business conditions and sales remain weak and those drive decisions to hire and invest.

For those who want a summary of the survey:

Business Conditions: The future remains uncertain for small-business owners; many tentative to expand their businesses or hire more workers in the coming months. Only seven percent (seasonally adjusted) characterized the current period as a good time to expand facilities—this reading is unchanged from the previous month. The net percent of owners expecting better business conditions in six months was a negative two percent (a 3 point improvement). However, more owners still expect the economy to deteriorate further than those who anticipate improvement. A net two percent of all owners expect improved real sales volumes, down 4 points, the third monthly decline in a row. Twenty (20) percent reported that “poor sales” are their top business problem, up 1 point from April. Overall, the outlook is not conducive for new spending or hiring.

Capital Expenditures: Based on data about capital expenditures, it appears that small-business spending is more for maintenance than for expansion. The frequency of reported capital outlays over the past six months rose 1 point to 55 percent, 11 points above the historic low last reached in August 2010, but still below readings from the first half of 2008. For historical context, an average of 60 percent of firm owners reported making capital outlays on 2007. Of those making expenditures in May, 37 percent reported spending on new equipment (down 2 points), 24 percent acquired vehicles (up 2 points), and 14 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (unchanged).  Overall, the sector exhibited small and incremental improvements in spending. The percent of owners planning capital outlays in the next three to six months dropped 1 point to 24 percent.

Job Creation: The change in employment per firm seasonally adjusted was a wash – coming in at a net “0”. Seasonally adjusted, 10 percent of the owners added an average of 2.6 workers per firm over the past few months, and 15 percent reduced employment an average of 2.1. The remaining 75 percent of owners made no net change in employment. Fifty-one (51) percent of the owners hired or tried to hire in the last three months and 37 percent (73 percent of those trying to hire or hiring) reported few or no qualified applicants for positions. The figures suggest that job creation was very weak, and finding workers for open positions is proving a challenge for some owners. The percent of owners reporting hard to fill job openings rose 3 points to 20 percent, the highest reading since June 2008, indicating that labor markets are tightening—either because labor demand is quietly rising or potential workers continue to leave the workforce. Seasonally adjusted, the net percent of owners planning to create new jobs rose 1 point to six percent, confirming the 5 point jump recorded in April. Overall, there was little improvement in the numbers to suggest that job creation will enjoy any precipitous increase in the near future.

Sales: It appears that sales are improving modestly in the small-business sector. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months dropped 2 points, falling to two percent, the second highest reading in 60 months (the highest was April’s reading of 4 percent). The low for the cycle (July 2009) was a net negative 34 percent reporting quarter over quarter gains, making the last few monthly readings a reason to be encouraged. Seasonally unadjusted, 25 percent of all owners reported higher sales (last three months compared to prior three months, unchanged) while 27 percent reported lower sales (down 3 points).  Spending on services has shown little life, it remains weak overall, handicapping a sector of the economy that is labor intensive and is the source of many potential new jobs. The net percent of owners expecting higher real sales in the coming months lost 4 points, falling to a net 2 percent of all owners (seasonally adjusted). Not seasonally adjusted, 36 percent expect improvement over the next three months (down 5 points) and 21 percent expect declines (up 2 points).

Steven Hansen

source: NFIB