Econintersect: The National Federation of Independent Business (NFIB)’s March 2013 monthly optimism index declined slightly 1.3 to 89.5 – and still at levels associated with past recessions.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
After another false start, small-business confidence has sputtered and stalled again. For the sector that produces half the private GDP and employs half the private sector workforce—the fact that they are not growing, not hiring, not borrowing and not expanding like they should be, is evidence enough that uncertainty is slowing the economy.
Virtually no owners think the current period is a good time to expand, because they simply don’t know what the future holds. So why invest? And with the lack of any sustainable fiscal policy or a federal budget, no one’s banking that Washington will be at forefront of any meaningful change. Overall, it appears that there will be little growth coming from the small business half of the economy; as the world economy slows, even big business may suffer.
Small business produces half the private GDP and employs half the private sector workforce. But it is not growing, not hiring, not borrowing and not expanding enough. Small business owners have been depressed since 2007 and that has not changed. In the March survey of NFIB’s 350,000 member firms, 77% expect the economy to be no better or even worse 6 months from now that it is currently. Only 4% think the current period is a good time to expand substantially, compared to an average of 17% for the period 1973 to 2007. More owners plan to reduce employment in the coming months than plan to create new jobs. More owners plan to reduce their inventories than plan to order new stocks. The bulk of growth comes from the increase in our population of about 3 million people and the growing need to simply replace stuff that is wearing out, not enough to get the economy back to trend growth much less the strong growth needed to restore employment to 2007 levels.
The Federal Reserve continues to assert its intention to purchase a trillion dollars of Treasury securities and mortgages, adding a trillion dollars to its portfolio and stuffing a trillion dollars of new liquidity into the banking system, until the unemployment rate falls below 6.5% or inflation breaks out. Then it will “consider” changing policy. Unless something really bad happens, this is a winning strategy for the Fed because eventually the private sector will improve, the labor force will shrink (as boomers leave), the unemployment rate will fall and the Fed can claim its policies “worked”, even if their policies made no contribution to the improvement or even slowed it down by creating uncertainty and fear among investors and business owners.
This is a risky strategy. The evidence that “uncertainty” is slowing the economy is pretty clear now (research at the San Francisco Federal Reserve for example) and uncertainty probably increases with the size of the Fed’s portfolio (as has the price of gold). The real economy is hardly growing yet the stock market and corporate profits are at record high levels. How do we make a record amount of money without producing more output and employing more workers? Such contradictions breed uncertainty.
In the meantime, a record low percentage of small business owners claim that credit is their top business problem (3%) while taxes get the most votes (23%). Record numbers of owners have no interest in a loan (over 60%), because they have no use for the funds that have a high probability of successfully generating a return so the loan can be repaid. The Fed has made sure that there is plenty of money to lend, but in the process may have reduced the confidence that borrows need to take risks, borrow, spend and expand. And then there’s the impact of fiscal policy (or the lack of a policy). The President is flying around the country doing fund-raisers and stumping for gun control, but he still has presented no budget proposal. Enough said.
Some other highlights of March’s Optimism Index include:
- Job Creation. Job creation in the small-business sector was perhaps the only bright spot in the March report. The fourth consecutive month of positive job growth, owners reported increasing employment an average of 0.19 workers per firm in the month of March. This is the best reading NFIB has recorded in a year; it is not expected to continue, moving forward .
- Hard to Fill Job Openings. For the 47 percent of owners who hired or tried to hire in the last three months, 36 percent (77 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.
- Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was negative 7 percent, an improvement of 2 points and the best reading in eight months. However, firms are still reporting more declines than gains. Seventeen (17) percent of small employers cite weak sales as their top business problem, a one point improvement over February.
- Earnings and Wages. Reports of positive earnings trends improved 3 points in March, but landed at a negative 23 percent—a very poor reading. However, a seasonally adjusted net 16 percent of owners reported higher employee compensation (up 2 points from last month), which is good news for employees.
- Credit Markets. Credit demands remained weak in March. Twenty-nine percent reported all credit needs met, and 49 percent explicitly said they did not want a loan (64 percent including those who did not answer the question, presumably uninterested in borrowing as well). Seven percent of owners surveyed reported that all their credit needs were not met, unchanged from February and 3 points above the record low.
- Capital Outlays. When it comes to business investment, owners are still in “maintenance mode.” The frequency of reported capital outlays over the past six months rose 1 point to 57 percent, rising steadily since January, though by very small amounts. The percent of owners planning capital outlays in the next three to six months was unchanged at 25 percent.
- Good Time to Expand. Only four percent of owners surveyed characterized the current period as a good time to expand facilities (down 1 point), and historically a very weak number. The net percent of owners expecting better business conditions in six months was a net negative 28 percent, unchanged from February but 7 points better than December). These readings are among the lowest in the 40 year history of the NFIB survey.
– The pace of inventory reduction continued, with a net negative six percent of all owners reporting growth in inventories (seasonally adjusted), 3 points better than February, but still more owners reducing stocks than adding to them.
– For all firms, a net negative one percent (down 2 points) reported stocks too low, historically a good level of satisfaction with inventory stocks.
- Inflation. With spending growth weak and excess capacity still widespread, there are few opportunities for small-business owners to raise prices. Seventeen (17) percent of the NFIB owners reported reducing their average selling prices in the past three months (up 1 point), and 18 percent reported price increases (down 3 points). Seasonally adjusted, the net percent of owners raising selling prices was a negative one percent, down 3 points. In the months to come, a net 17 percent of owners plan to raise average prices (down 6 points).