November 2013 Small Business Optimism Index Marginally Higher

Econintersect: The National Federation of Independent Business (NFIB)’s November 2013 monthly optimism index up marginally from 91.6 to 92.5.

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

The year is not ending on a high note in the small-business sector of the economy. The ‘bifurcation’ continues with the stock market hitting record high levels, but the small-business sector showing little expansion beyond that driven by population growth

There is also a hint that employers are getting an inkling of what Obamacare might mean for labor costs; concern about the cost and availability of insurance bumped up three percentage points after a long period of no real change. Small-business owners who provide health insurance may soon find that their plans are ‘unacceptable’ to Obamacare and be obliged to either pay more for the coverage or abandon it and pay the benefit in cash. This will be a major source of angst and uncertainty in 2014.

Report Commentary:

Economists are raising their forecasts for 2014, but this appears to be based more on “hope” than on any real “change” in the fundamentals. Consumers are a bit more optimistic as are small business owners, but in the context of history, these measures are still weak. The nonmanufacturing ISM is continuing to fall as predicted by the NFIB data. Manufacturing is doing well, but there aren’t many jobs to be had there. Total employment remains millions below its peak (January, 2008, the start of the Great Recession) and much of the decline in the unemployment rate is due to workers leaving the workforce, not new job creation. Absent the stunning decline in the labor force participation rate, estimates put the unemployment rate in double digit levels. So, fewer workers making GDP and population growth projected to be the lowest in decades provide a background for continued slow growth.

NFIB’s December survey did provide some positive signals, with the best job creation figure since 2007 and a large increase in the percent of owners reporting actual capital outlays in recent months. The jump of 9 percentage points in December over November suggests that most of the increase in spending came very late in the year. Expectations for real sales growth and for business conditions over the next six months improved substantially over November readings as well. There is not an obvious event that would trigger these gains in the last month of the year, but they are welcome.

The President thinks the way to address the malaise in the economy is to give another $26 billion to the long-term unemployed, shown to produce new jobs by “independent economists” (we know who that is) according to the President. If you borrow $26 billion from China and give it to consumers, it probably does have a positive impact, but does nothing to fix the economy or encourage labor force participation or improve the labor force. Servicing this debt will soon put a real crimp in the government budget. Also proposed are tax breaks in some part of the country for hiring unemployed people (which only benefits employers who were going to hire anyway; it doesn’t produce extra job creation). Add to that a proposed increase in the minimum wage to $10, alleged to create more spending and jobs, proven by real economists (and common sense) to be incorrect. This is further evidence (if we needed it) that economic policy is about politics and winning votes, not improving the economy.

Even with the improved outlook, more owners still expect the economy to be worse mid-year than expect it to be better (27 percent vs 17 percent). Small business owners will also come face to face with the reality of Obamacare as the year progresses. Since it is an election year, the main theme will be addressing the disparities in income and wealth (i.e. tax the rich and increase welfare programs) rather than promoting policies that would create jobs and raise incomes in a growing economy. This year, policy will be all about votes..

Some other highlights of this Optimism Index include:

Job Creation. NFIB owners increased employment by an average of 0.05 workers per firm in November (seasonally adjusted), half the October figure, but positive.  Seasonally adjusted, 14 percent of the owners (up 2 points) reported adding an average of 3.7 workers per firm over the past few months.  Offsetting that, 12 percent reduced employment (up 3 points) an average of 3.4 workers, producing the seasonally adjusted gain of 0.05 workers per firm overall.  The remaining 74 percent of owners made no net change in employment.  Fifty-one percent of the owners hired or tried to hire in the last three months and 44 percent reported few or no qualified applicants for open positions.  

Hard to Fill Job Openings. Twenty-three percent of all owners reported job openings they could not fill in the current period (up 2 points), a positive signal for the unemployment rate and the highest reading since January, 2008.  Thirteen percent reported using temporary workers, down 2 points from October.

Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a negative 8 percent.  Fifteen percent still cite weak sales as their top business problem. The net percent of owners expecting higher real sales volumes rose 1 point to 3 percent of all owners after falling 6 points in October (seasonally adjusted), a weak showing. Not much help for hiring or inventory investment in those numbers.

Earnings and Wages. Earnings trends deteriorated a bit in November, falling to a net negative 24 percent.   If these were publically traded companies, the stock indices would not look good.  The economy remains bifurcated, large firms doing fairly well, small businesses showing little growth or improvement. Three percent reported reduced worker compensation and 16 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation (down 2 points). A net seasonally adjusted 14 percent plan to raise compensation in the coming months, up 4 points. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery. With a net 14 percent raising compensation but a net 2 percent raising selling prices, profits will continue to be under pressure.

Credit Markets. Credit continues to be a non-issue for small employers with just 4 percent of the owners reporting that all their credit needs were not met, down 2 points.  Thirty-two percent reported all credit needs met, and 52 percent explicitly said they did not want a loan.  Twenty-nine percent of all owners reported borrowing on a regular basis, up 1 point but a near-record low.  The average rate paid on short maturity loans was steady at 5.4 percent

Capital Outlays. The frequency of reported capital outlays over the past 6 months fell 2 points to 55 percent, stuck in the “mid-50s” since recovering in 2012 from the lows of 45 reached in late 2009 and early 2010.   The small business sector appears to still be in “maintenance mode”, with little expansion planned in the future.  The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 24 percent. Capital spending is at its highest point since early 2008 but has been stuck well below normal levels for several years, threatening the improvements in productivity needed to raise real wages.

Inventories.

• The pace of inventory reduction continued, with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), 1 point worse than October.
• The negative outlook for the economy and real sales prospects adversely impacted inventory satisfaction. The net percent of owners planning to add to inventory stocks was a net 0 percent (up 1 point), no new orders for inventory when stocks are excessive compared to expected sales.

Inflation. Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, down 3 points. Seasonally adjusted, a net 19 percent plan price hikes, up 1 point. Not much of this is likely to “stick” if owners are correctly forecasting the future of the economy over the next six months.

Steven Hansen

source: NFIB