Econintersect: The National Federation of Independent Business (NFIB)’s August 2012 monthly optimism index rose 1.7 to 92.9 – slightly off the lowest point of 2012 achieved last month, but still higher than one year ago.
NFIB reports usually contain blasts directed at Washington. This month’s sentiment was on taxation.
“In spite of a terrible jobs report from the Labor Department and an increase in the number who view the current period as a terrible time to expand, small-business owners continue to show their resilience; last month they were even a bit more optimistic about improvements in real sales volumes and business conditions,” said NFIB chief economist William Dunkelberg.
“However, nothing happened in August to really improve their outlook—economic news was uninspiring and mixed. But it is possible that the uptick in their spirits will forecast of the election outcome and the chance for a favorable resolution of our fiscal dilemma. If election odds start changing, owners (and consumers) may change their minds about spending, hiring and saving, but for now, expect little change in the current course of the economy.”
The additional report commentary:
As expected, there was no real change in owner optimism in August since nothing happened to make owners more confident about the future. Consumers were equally unimpressed according to the University of Michigan/Reuters survey. The survey shows only 12 percent of consumers think the government is doing a good job and 46 percent feel government is doing a bad job. And while the top ranked problem (out of 75) in the recently released NFIB Problems and Priorities survey was health insurance costs, the second and fourth ranked problems were “uncertainty about the economy” and “uncertainty about government policy.” This goes a long way toward explaining why spending seems to be in “maintenance mode.” With 50/50 odds in the polls, the president will be determined by the flip of a coin. The policy outcomes depending on who wins appear to be hugely different, and consequently, owners are not betting their hard earned money on the flip of a coin. They are waiting for more certainty about the direction of the economy and policy.
Since 1986 when NFIB started the monthly surveys, the Index has been below 93 for a total of 50 months. Forty-three (43) of them have occurred in the current “recovery” which began in June 2009. That says it all about this recovery. Index readings of a typical recovery are generally above 100, the average historical reading.
Always looking for something positive in these dreary numbers, the labor market readings were very solid, with the best hiring plans number in 53 months and a 3 point gain in the job openings indicator. Good for the future, but really no good news about recent months, job creation for existing firms was still basically nil. Job creation in the private sector will depend on large firm hiring, if any, and jobs at new firms that are being created by population growth. Capital spending stirred a point and plans rose 3 points, but still recession type readings. And expectations for real sales gains and for business conditions six months out did improve, but also remain at recession levels.
Some Fed officials still talk about the unwillingness of banks to lend, and for some troubled banks, that might be the case. But these are few in number compared to the number of independent banks available and bankers continue to complain about a dearth of qualified applicants, a position supported by the NFIB surveys. QE3 seems to be creeping toward existence, but opposition is stiff and logical – who hasn’t already responded to record low mortgage rates? What firms didn’t pull the trigger on a project but for a quarter point rate differential? Indeed, if banks are reluctant, it may be due to the Fed’s engineered low rates, too low for ordinary banks to risk locking in for long periods of time. Yes, there might be a third stock market pickup from QE3, but this really isn’t going to get consumers to spend more, it would just be a gift to TBTF banks and traders. And it’s likely to be a very small response. The Fed may be way off its unemployment target (not specified), but QE3 will not have an impact on employment. It will make the Fed’s “unwinding” job more difficult and exposes the Fed to the risk of discovering that “the Emperor wears no clothes.”
A summary of the survey:
Capital Expenditures: The biggest news about capital expenditures was the increase in owners expecting better business conditions in six months; those expectations gained 6 points, settling at a net negative two percent. Not seasonally adjusted, 14 percent expect an improvement in business conditions (a 2 point gain), and 24 percent expect a deterioration (down 1 point). A net one percent of all owners expect improved real sales volumes—up 5 points from July, but still 11 points below February’s reading, which was this year’s high. The frequency of reported capital outlays over the past six months gained 1 point, rising to 55 percent. Of those making expenditures, 41 percent reported spending on new equipment (up 3 points), 21 percent acquired vehicles (up 2 points), and 14 percent improved or expanded facilities (unchanged). The percent of owners planning capital outlays in the next three to six months gained 3 points, rising to 24 percent. Still, only four percent characterized the current period as a good time to expand facilities, in contrast with 10 percent in December 2011 and 28 percent in December 2004.
Sales: Sales trends reports confirm that consumer spending is weak and that it slowed mid-year. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 4 points, falling to negative 13 percent, after a 7 point decline in June. Twenty (20) percent still cite weak sales as their top business problem, historically high, but down from the record 33 percent reading in December 2010. Seasonally unadjusted, 24 percent of all owners reported higher sales and 29 percent reported lower sales. The net percent of owners expecting higher real sales rose 5 points and settling at a net 1 percent of all owners (seasonally adjusted), ending a five month decline of 16 percentage points. However, this is a weak reading and unlikely to trigger orders for new inventory or business expansion.
Job Creation: Job growth in the small-business sector mirrored other national reports: the net change in employment per firm over the past few months (seasonally adjusted) was -.05, making it the third negative month in a row. With job growth essentially “zero,” the only jobs being created are by new firms to serve new consumers due to population growth. Seasonally adjusted, 12 percent of owners surveyed reported adding an average of 2.7 workers per firm over the past three months, and 10 percent reduced employment an average of 2.5. The remaining 78 percent of owners made no net change in employment. Forty-nine (49) percent of the owners hired or tried to hire in the last three months and 37 percent reported few or no qualified applicants for open positions. The percent of owners reporting hard to fill job openings rose 3 points to 18 percent of all owners. Not seasonally adjusted, 13 percent plan to increase employment at their firm (up 2 points), and 9 percent plan reductions, unchanged. Seasonally adjusted, the net percent of owners planning to create new jobs rose 5 points to 10 percent.
Credit Markets: There were no interesting developments in credit markets. Seven (7) percent of the owners reported that all their credit needs were not met (unchanged), 31 percent reported all credit needs met, and 53 percent explicitly said they did not want a loan (62 percent including those who did not answer the question, presumably uninterested in borrowing as well). Financing was the top business problem for only three percent of those surveyed; this compared to 23 percent who cited taxes, 20 percent who cited weak sales and 21 percent who named unreasonable regulations and red tape. Credit is not a problem for most owners and the report suggests that many “qualified” applicants are sitting on the sidelines waiting for economic conditions to improve before borrowing. Thirty (30) percent of all owners reported borrowing on a regular basis, down 1 point from July. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), unchanged. Three (3) percent of owners reported higher interest rates on their most recent loan, and five percent reported getting a lower rate.