September 2013 Small Business Optimism Index Again Declines Marginally

Econintersect: The National Federation of Independent Business (NFIB)’s August 2013 monthly optimism index declined marginally from a corrected 94.1 to 93.9.

NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.

The change in this month’s Index was little more than ‘statistical noise,’ but the drop in outlook for future economic conditions is evidence that many owners are keeping an eye on Washington.

Prospects for politicians and policymakers ‘getting it right’ are low, and job creators are rolling their eyes and shaking their heads thinking, This is certainly not the way to run the largest enterprise in the world. Between botched healthcare implementation and one manufactured crisis after another, consumers and small-business owners are likely to remain pessimistic, accepting the notion that growth is going to be sub-par and that their government is likely to continue in dysfunctional mode for months to come.

Report Commentary:

The Optimism Index was basically unchanged, giving up two-tenths of a point, statistical noise. The only interesting change in the components was an 8 point deterioration in expectations for business conditions over the next six months.  And why not, prospects for Washington “getting it right” are low. The Federal Reserve will persist, even though there is little evidence that they are improving employment. This creates heightened concerns for how their portfolio will be “managed”. The Federal Reserve is buying the equivalent of the Treasury issuance of debt to finance the deficit, not a promising situation. There isn’t much evidence that buying a trillion dollars-of bonds is improving employment. However, one can always argue the counter-factual, that without QE, employment growth would have been even worse. Certainly the rich would be poorer and big banks would have made less. But that’s not what monetary policy should be about.  Fiscal policy? What a mess. No budget for years, sequester is now built-in…this is certainly not the way to run the largest enterprise in the world.

Consumers and small business owners are pessimistic, not expecting a “crash” in the economy, just accepting the notion that growth is going to be sub-par and that their government is likely to continue in dysfunctional mode. The misstatements and exaggerations and distortions being sold to the public are stunning, but after all, these are politicians. A desperation deal will likely evolve, and it will be poorly constructed and conceived as usual. This is a “game of thrones” indeed, and no one is really concerned about the peasants, the politicians just want to make their points.

Some other highlights of August’s Optimism Index include:

• Job Creation. Job creation was down in September. NFIB owners reduced employment by an average of 0.1 workers per firm in September after August’s slight gain (0.08 workers added on average) following three months of negative numbers.

• Hard to Fill Job Openings. Twenty (20) percent of all owners reported job openings they could not fill in the current period (up 1 point), and 14 percent reported using temporary workers, down 2 points from August. Most of the jobs “created” will likely be dominated by part-time workers as owners hedge their hiring while they try to fathom the health care law regulations and penalties.

• 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 negative 6 percent. The net percent of owners expecting higher real sales volumes rose 3 points to 8 percent of all owners. This is welcome news asiImproved sales expectations are needed to trigger hiring and new inventory orders, but this trend is a bit inconsistent with the larger deterioration in expected business conditions.

• Earnings and Wages. Earnings trends worsened a bit in September, falling 2 points to negative 23 percent. Three percent of owners reported reduced worker compensation and 20 percent reported raising compensation, yielding a net 17 percent reporting higher worker compensation (up 2 points). A net 13 percent plan to raise compensation in the coming months, up 1 point. With a net 17 percent raising compensation but only a net 1 percent raising selling prices, profits will continue to be under pressure.

• Credit Markets. Credit continues to be a non-issue for small employers, 6 percent of whom say that all their credit needs were not met in September, up 1 point from August. Twenty-eight (28) percent of owners surveyed reported all credit needs met, and 53 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 September, the frequency of reported capital outlays over the past six months rose 2 points to 55 percent. The percent of owners planning capital outlays in the next three to six months rose 1 point to 25 percent.

• Good Time to Expand. In September, only 8 percent characterized the current period as a good time to expand (up 2 points). The net percent of owners expecting better business conditions in six months was a net negative 10 percent, 8 points worse than August’s reading.

• Inventories. The pace of inventory reduction continued in September, with a net negative 7 percent of all owners reporting growth in inventories, 2 points down from August. For all firms, a net 0 percent (unchanged) reported stocks too low, a historically “satisfied” reading. Plans to add to inventories were unchanged from August at a net 2 percent, a bit inconsistent with the expectations for sales growth.

• Inflation. Fourteen (14) percent of the NFIB owners surveyed reported reducing their average selling prices in the past three months (down 2 points), and 14 percent reported price increases (down 3 points). The net percent of owners raising average selling prices was 1 percent, down 1 point. As for prospective price increases, 21 percent plan on raising average prices in the next few months (up 1 point), and 2 percent plan reductions (down 1 point). A net 19 percent plan price hikes, up 1 point.

Steven Hansen

source: NFIB