Econintersect: The National Federation of Independent Business (NFIB)’s May 2013 monthly optimism index improved 2.3 to 94.4 – the second highest since the recession started December 2007. In May’s report, eight components improved, one was unchanged – whilst one declined.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
Small-business confidence rising is always a good thing, but it’s tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis, and while the stock market sets records, GDP posts mediocre growth.
The unemployment rate remains in the mid-7s and it is departures from the labor force—not job creation—that is contributing to its decline when it does fall. It’s nice to see confidence not shrinking, but there isn’t much to hang your hat on in this report. We are back to where we were in May 2012. Two good months don’t make a trend, but we can’t have a trend without them, so it’s a start.
The small business half of GDP is not generating growth beyond population gains. More businesses are being formed than lost, but too many existing firms have not yet started to replace the workers shed during the recession. The Optimism Index is at its May 2012 level, which is identical to the November 2007 level. Since then, the Index has been higher in only three months, each time by less than 2 points.
Report Commentary:
The U.S. economy continued to plod along in the first quarter, now at a revised 2.4%. Not much of an improvement over the 1.4% fourth quarter reading and still well below trend. The ISM has decline for three straight months and is below 50, the dividing line between expansion and contraction. Government spending has been in contraction for some time now, cutting the growth rate by a half a point or more while the private sector grows – but this is good. The deficit is now projected to fall to $650 billion, crushed by revenues from accelerated 2012 income generation induced by higher 2013 tax rates and by restoration of the FICA tax as well as sequestration. Of course the IRS may still be giving line dancing lessons. The Fed is on course to purchase $540 billion of Treasury bonds (almost all of the projected deficit) and $480 billion of mortgage securities. An increasing number of observers wonder whether this is having any impact of consequence on employment (the alleged target) or even housing. It is contributing to uncertainty about the longer term impact of QE on the economy, bond bubbles, and the impact of the rapid acceleration of house prices (from very low levels historically of course).
The small business half of GDP is clearly not participating much beyond growth generated by population gains. More businesses are being formed than lost, so there is some boost to job creation there, but too many existing firms have not yet started to replace the workers shed during the recession. The Optimism Index is back to the May 2012 level which are identical to the November 2007 level (the Index fell all through 2007, signaling the oncoming recession). Since then, the Index has been higher in only three months, and by less than 2 points. The low for that period was 81.0 reached in March, 2009. So the Index is 13 points higher now, good news, but 6 points below the pre-2008 average and 13 points below the peak for the expansion, bad news. Until this sector gets in gear, it will be hard to generate meaningful economic growth. GDP growth was 8% in 1983, the first year of that recovery period.
There are many headwinds for growth, the most important being consumer spending. Nothing encourages hiring and inventory and capital investment more than an growth in customers and spending. Consumer sentiment is up some, but not really supported by income growth or new jobs. The savings rate is under 3%, so spending is financed by reduced saving (which pays nothing anyway – people who bought 30 year Treasury bonds in 1983 are just now losing those great coupons). The flow of new regulations is very strong (the President promised to use regulatory power to accomplish his goals even if Congress did not cooperate), each agency with its own set of “victims”. On top of that, the ACA is about to grip the entire business community in a morass of new taxes, forms to fill out, fines and higher labor costs. Our global customers are experiencing slow growth for the most part and buying less. Monetary policy has become incomprehensible and fiscal policy is in disarray. Uncertainty is a major impediment to economic progress. With 2014 elections almost upon us, we’ll just have to wait and see.
Some other highlights of May’s Optimism Index include:
- Job Creation. Jobs creation fell for the first time since November 2012. Small employers reported an average gain of negative 0.04 workers per firm—essentially zero.
- Hard to Fill Job Openings. Forty-seven (47) percent of owners hired or tried to hire in the last three months and 38 percent (81 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.
- Sales. The net percent of all owners* reporting higher nominal sales in the past three months compared to the prior three months was unchanged at a negative 4 percent. While this is the best reading in nearly a year, there are still more firms reporting declines than gains. The net percent of owners expecting higher real sales volumes rose 4 points to 8 percent of all owners. Sales expectations are trending better, but are still historically weak.
- Earnings and Wages. Earnings trends improved 1 point over April’s reading, landing at a negative 22 percent. Three percent of small employers reduced worker compensation and 20 percent raised compensation, yielding a net 16 percent who reported higher worker compensation (up 1 point). A net 9 percent of owners plan to raise compensation in the coming months, unchanged in May.
- Credit Markets. Credit continues to be a non-issue for small employers, only 5 percent of whom say that all their credit needs were not met in May. This is down 1 point from April and the lowest reading since February 2008. Twenty-eight (28) percent of owners surveyed reported that all their credit needs were met last month, and 53 percent explicitly said they did not want a loan (67 percent including those who did not answer the question, presumably uninterested in borrowing as well).
- Capital Outlays. Owners put a few more dollars into capital expenditures in May; the frequency of reported capital outlays over the past six months rose 1 point to 57 percent in May. However, this is still 8 points below the average spending rate through 2007. Plans to increase expenditures stagnated, with 23 percent of owners planning capital outlays in the next three to six months.
- Good Time to Expand. In May, only 8 percent of owners characterized the current period as a good time to expand. This is up 4 points from a very weak reading in April, but still a poor showing when compared to an average value of 16 percent pre-recession. The net percent of owners expecting better business conditions in six months was a net negative 5 percent, 10 points better than April and 23 points better than March.
- Inventories. In May, a net negative 7 percent of all owners surveyed reported growth in inventories, one point below that reported in April. For all firms, a net 1 percent (up 2 points) reported stocks too low, an unusually “lean” level of satisfaction with inventory stocks. More owners are reducing stocks than adding to them, but the overall inventory picture was rather benign.
- Plans to add to inventories gained 3 points, rising to a net 3 percent of all firms.
- Inflation. The net percent of owners raising selling prices in May was 2 percent, down 1 point from April. Sixteen (16) percent of NFIB owners reported reducing their average selling prices in the past three months, and increase of 1 point, and 19 percent of owners surveyed reported price increases (down 1 point). As for prospective price increases, 17 percent of small employers plan to raise average prices in the next few months (down 4 points), and 3 percent plan price reductions. Seasonally adjusted, a net 15 percent plan price hikes, down 3 points.
source: NFIB
