Econintersect: The National Federation of Independent Business (NFIB)’s August 2013 monthly optimism index declined marginally from 94.1 to 94.0.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
August in Washington was typical – nothing got done, and therefore nothing changed the outlook of small-business owners who have the same list of concerns today that they had in January, April and July. But we saw some interesting things happening with the Index this month.
The August reading provided us with a rather perplexing set of statistics; internally consistent on some dimensions, such as lower sales bringing lower profits, but contradictory in other ways, such as lower job openings but huge gains in hiring plans. We know that the upcoming implementation deadlines for the healthcare law are weighing on the minds of employers, and the current dim prospects for real tax reform must be, as well. The September survey will hopefully straighten things but with Syria on the horizon, the budget situation still up in the air, and Obamacare being rolled out, clarity over our economic direction is not likely to be the outcome.
Overall, the Index of Optimism says the small business sector is going nowhere and that’s what it feels like. Consumer sentiment is falling so there is no wind in the sails of the consumption barge. It floats, but no speed. The Reuters/University of Michigan survey puts support of government policies at single digits. Owner uncertainty about government economic policy ranked in their top five business problems, no change on that front and as confusing as ever. The PMI held at the 55 level, but the jobs component fell which was a surprise. Private construction was up 10% year over year, and that could mean more jobs in construction for small businesses.
Owners reported lousy performance in the past few months with employment cuts, falling sales and profits, no ability to raise prices, and weak sales the top business problem for 1 in 5 employers. In particular, spending on services (70% of consumption) is very sluggish, up 0.5% year over year and declining at a 1.5% annual rate in July.This is where jobs are generated. Disposable income is up only 0.8% year over year, so no support for spending there. The savings rate is very low again therefore not much room to support more spending with less saving. Durable goods spending has posted strong growth, but this are doesn’t produce many new jobs
Yet, job creation plans for the next few months surged (after seasonal adjustment) and plans to make capital outlays and expand inventory holdings improved as well. While more owners expect the economy to sink further over the next six months than improve, there was a surge in expectations for gains in real sales volumes at their own companies. This is paradoxical at the macro level, although with differing regional economies, possible.
Financial markets are glued to Syria, but that will have little impact on the real economy nor will Federal Reserve “tapering” have a noticeable impact on the real side. Financial markets (where trading, not investing, dominates) will see more volatility. If tapering occurs, it will fall on Treasury purchases, not MBS. The market is a bit short of Treasuries for doing business anyway, so any reduction in the $85 billion in purchases will fall on Treasury bonds. Overall, the NFIB survey holds little promise of any more than the 2% growth we have experienced since the recovery began in 2009. That means unemployment will remain high and if the rate falls, it is likely that a decline in the labor force will be the cause, not job creation unless owners really mean what they said in the August survey.
Some other highlights of August’s Optimism Index include:
- Job Creation. August marked the fourth consecutive month of negative job growth for small-business owners. The average increase in employment for small firms surveyed was negative 0.3 workers per firm. Dramatic employment reductions have ceased but hiring has not resumed at normal levels.
- Hard to Fill Job Openings. Sixteen (16) percent of all owners reported job openings they could not fill in the current period (down 4 points), and 9 percent reported using temporary workers, down 6 points from July. Most new jobs being created are likely to be in the part-time category.
- Sales. The net percent of all owners* reporting higher nominal sales in the past three months compared to the prior three months plunged 17 points to a negative 24 percent—the second steepest monthly decline in survey history. The net percent of owners expecting higher real sales volumes surged 8 points, to 15 percent of all owners, a new high for this recovery period.
- Earnings and Wages. Earnings trends took a hit in August with the major softening in sales, falling 13 points to negative 35 percent. Five percent of owners reported reduced worker compensation and 21 percent reported raising compensation, yielding a seasonally adjusted net 15 percent reporting higher worker compensation (up 1 point). A net 12 percent plan to raise compensation in the coming months, up 1 point.
- Credit Markets. Credit continues to be a non-issue for small employers, 7 percent of whom say that all their credit needs were not met in August, up 2 points from July. Twenty-nine (29) percent of owners surveyed 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).
- Capital Outlays. In August, the frequency of reported capital outlays over the past six months rose 3 points to 57 percent. The percent of owners planning capital outlays in the next three to six months rose 2 points to 25 percent.
- Good Time to Expand. In August, only 7 percent characterized the current period as a good time to expand (down 2 points). The net percent of owners expecting better business conditions in six months was a net negative 10 percent, 4 points worse than July’s reading.
- Inventories. The pace of inventory reduction continued in August, with a net negative 11 percent of all owners reporting growth in inventories, 1 point down from July. For all firms, a net negative 1 percent (up 1 point) reported stocks too low, unchanged from July. Plans to add to inventories were up 3 points to a net 2 percent, in line with an improvement in expectations for sales growth.
- Inflation. Seventeen (17) percent of the NFIB owners surveyed reported reducing their average selling prices in the past three months (up 3 points), and 18 percent reported price increases (up 1 point). The net percent of owners raising average selling prices was 2 percent, down 2 points. As for prospective price increases, 21 percent plan on raising average prices in the next few months (up 5 points), and 3 percent plan reductions (unchanged). A net 20 percent plan price hikes, up 5 points.