Econintersect: The National Federation of Independent Business (NFIB)’s December 2013 monthly optimism index up marginally from 92.5 to 93.9.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
While there has been no sign that a real recovery has begun, we can be encouraged that the economy is at least crawling forward and not heading in reverse.
Some segments of the economy are showing improvement (manufacturing, construction, professional services), but consumer spending, especially on services (70 percent of consumption), has lagged. Spending on items such as automobiles has certainly increased, however a corresponding rise in hiring has not yet materialized.
Two monthly advances could be the start of a more positive trend, but there are many threats to improvement, including the majority of respondents feeling the current climate is not “a good time to expand substantially” blaming the political climate, something that may not improve in an election year. Obamacare will continue to generate issues for small business owners as well as individual consumers. And the national debt continues to rise with another fight to increase the debt ceiling looming once again. The uncertainty that has contributed to our slow recovery is clearly still present – making any advances shaky at best.
GDP growth was unexpectedly strong, but most of that was inventory building, with some more exporting. Domestic sales grew only 1.9 percent, more in tune with other measures of how well the economy is doing. Inflation was low as expected from the NFIB data as few are raising prices. Employment was better at the end of the year, as the NFIB indicators anticipated – but not enough to restore 2007 levels of employment, six years later. The only item in small business owners’ “top 10” list of issues is that energy prices are falling. So unfortunately, not much to be optimistic about.
There is a hint that owners are getting an inkling of what Obamacare might mean for labor costs, concern about the cost and availability of insurance bumped up 3 percentage points after a long period of no real change. Small firms aren’t currently required to provide insurance (this could change in the future of course), but many do. These owners may find their insurance plans “unacceptable” to Obamacare and be obliged to either pay more for the coverage or abandon it and pay the benefit in cash. This will certainly be a source of angst and confusion in 2014.
The year is not ending on a high note in the small business sector of the economy. The “bifurcation” continues, the “Fortune 500” are performing well with the stock market hitting record high levels. But the small business sector is showing little growth beyond that driven by population growth. Since January 1st, the S&P has added $3.8 trillion in value – but have output and profits really increased that much? Or is this the work of the Federal Reserve which has voted to leave rates unchanged in the last 39 meetings, and likely adding to this total in December. Maybe fiscal policy will get on course and give owners something to cheer about.
Some other highlights of this Optimism Index include:
Labor Markets.Owners increased employment by an average of 0.24 workers in December, the best reading since February 2006. Fourteen percent of the owners reported adding an average of 3.4 workers per firm over the past few months. Offsetting that, 10 percent reduced employment an average of 1.8 workers, producing the seasonally adjusted net gain of 0.24 workers per firm overall. The “difference” between these two measures is new job creation. Overall, it appears that owners hired more workers on balance in December than their hiring plans indicated in November, a favorable development. Job openings maintained its solid reading and job creation plans, though slipping a point, held on to the improved levels observed in recent months, anticipating a better job creation figure than reported in November and no deterioration in the unemployment rate.
Capital Spending. The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four percent reported outlays, the highest level since early 2005. The surge in spending, especially on equipment and fixtures and furniture, is certainly welcome and is hopefully not just an end-of-year event for tax or other purposes. This level of spending is more typical of a growing economy.
Sales. The net percent of all owners reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a negative 8 percent. Fourteen percent still cite weak sales as their top business problem, but the lowest since June 2008. The net percent of owners expecting higher real sales volumes rose a solid 5 points to 8 percent of all owners, restoring the September level of positive expectations. Not seasonally adjusted, 26 percent expect improvement over the next 3 months and 36 percent expect declines. Although restoring the highest reading since early 2012, the gain still leaves sales expectations in a relatively soft position.
Inflation. The net percent of owners raising selling prices was a negative 1 percent, down 3 points. There is no evidence that firms are able to raise prices, even though they may wish to as many firms are raising compensation, but not passing those costs on to customers. Twenty-five percent plan on raising average prices in the next few months, and 3 percent plan reductions. Clearly, reality is preventing firms from implementing the price hikes they would like to have. A net 19 percent plan price hikes, a long way from the net negative 1 percent reporting higher actual prices in recent months.
Earnings and Wages. Earnings trends improved a bit in December, rising 2 points to a net negative 22 percent. Not seasonally adjusted, 16 percent reported profits higher quarter to quarter, and 37 percent reported profits falling. If these were publically traded companies, the stock market indicators would not look good. The economy remains bifurcated, large firms doing fairly well, small businesses showing little growth or improvement.
Credit Markets. Four percent of the owners reported that all their credit needs were not met, unchanged and an historic low. Thirty-two percent reported all credit needs met, and a record high 55 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 23 percent citing taxes, 20 percent citing regulations and red tape and 14 percent citing weak sales.