Econintersect: The National Federation of Independent Business (NFIB)’s February 2014 monthly optimism index dropped from 94.1 to 91.4.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
Uncertainty is a major cause of the Index’s dip. Lacking any progress in Washington and facing continued unknowns with the healthcare law, the EPA, the minimum wage, tax reform and more, it is no surprise that the Small Business Optimism Index fell, reversing a few months of modest gains.
As long as uncertainty remains high, owners will remain cautious when it comes to increasing inventory. Business owners aren’t going to bet their money on a future they cannot see clearly. The February report on net new jobs was better than expected, but inadequate to the task of reducing the unemployment rate which rose a tenth of a point. As disturbing as the decline in job creation plans was, the plunge in expectations for improvements in real sales in the coming months and for business conditions 6 months from now, show that we shouldn’t expect blue skies soon.
The one “green shoot” in the January survey, a surge in hiring plans, was crushed by the continued onslaught of a wintry recovery now in its 5th year. The February report on net new jobs was better than expected, but inadequate to the task of reducing the unemployment rate which rose a tenth of a point. As disturbing as the decline in job creation plans was, the plunge in expectations for improvements in real sales in the coming months and for business conditions 6 months from now, undoubtedly the reason for the decline in hiring plans. Averaging 22 percent from 1973 through 2007, a net 22 percent expected real sales volumes to rise in the following 3 month period. In February, it was a meager net 3 percent.
Uncertainty is a major cause of the reluctance to spend and hire. Large firms are loaded with cash but unwilling to spend. For small firms, record low numbers are reporting the current period as a good time to expand, for 5 years and running. More firms are reducing inventory than adding to it, even in a growing economy. And more firms are expecting a deterioration in the economy than an improvement. In NFIB’s Problems and Priorities survey, uncertainty about the economy and government policy both rank in the top 5 most severe problems facing small business owners. You don’t bet your money on a future you cannot see clearly.
The Federal Reserve now holds more government bonds than either Japan or China and remains the major buyer of mortgage securities. In the “olden days” banks made mortgages, lending out depositors money to credit worthy home buyers. Now the regulatory cost of making mortgages is so large that only a few big banks will do it. Regulators no longer allow banks to lend for 30 years and finance with short-term deposits. This risk is dumped onto the taxpayer.
The economy is not doing well and little is happening in Washington that would lead owners to think otherwise. Even the Federal Reserve’s guidance is for a weak economy, that’s what owners read and they are the experts (and policy makers). All policy is focused on the election, pandering to special interests, not the interests of the “middle class” (most of us) which simply wants to see better economic growth and serious job creation (along with improving compensation). Consumer sentiment is equally morose for this stage of a “recovery”. Only 1 in 10 consumers think government policy is good. The IRS is still taking the 5th and the DOJ investigator sends campaign money to the Democrat party. None of the “issues” are resolved; those involved hoping to stall long enough for other crises to shove them off the front pages – maybe Putin will save them. But the stock market is hitting new highs so I guess we should all cheer.
Some other highlights of this Optimism Index include:
Labor Markets. NFIB owners increased employment by an average of 0.11 workers per firm in February (seasonally adjusted), virtually unchanged from January. Seasonally adjusted, 12 percent of the owners (down 1 point) reported adding an average of 3.0 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (down 1 point) an average of 2.7 workers, producing the seasonally adjusted net gain of 0.11 workers per firm overall. Since the weather in February was about as bad as in January, 150,000 new jobs would be a pleasant surprise but the unemployment rate will likely not change. Seasonal adjustments only work when the weather is “average” for the period, which it clearly has not been for the last 2 months. The remaining 78 percent of owners made no net change in employment. Forty-seven percent of the owners hired or tried to hire in the last three months and 40 percent (85 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.
Job Creation. Twenty-two percent of all owners reported job openings they could not fill in the current period (unchanged). This suggests that the unemployment rate did not change much in February. Thirteen percent reported using temporary workers, down one point from January. Job creation plans gave up January’s welcome gain, falling 5 points to a seasonally adjusted net 7 percent. Not seasonally adjusted, 17 percent plan to increase employment at their firm (down 1 point), and 4 percent plan reductions (down 1 point).
Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 2 points to a net negative 8 percent, typical of the 2013 experience. Sixteen percent cite weak sales as their top business problem, still above levels experienced in “normal” times. Seasonally unadjusted, 21 percent of all owners reported higher sales (up 1 point) and 34 percent reported lower sales (unchanged), not a very strong report.
Earnings and Wages. Earnings trends were stable at a miserable net negative 27 percent (net percent reporting quarter to quarter earnings trending higher or lower). Pressure from labor costs that can’t be passed on are keeping pressure on earnings gains. Two percent reported reduced worker compensation and 23 percent reported raising compensation, yielding seasonally adjusted net 19 percent reporting higher worker compensation (unchanged), the best readings since 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months, up 3 points from January. 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 19 percent raising compensation but net 1 percent raising selling prices, it is easy to see why profits remain under pressure. For now, higher compensation costs are not being passed on to customers.
Credit Markets. On Main Street, credit continues to be a non-issue for small employers. Five percent of the owners reported that all their credit needs were not met, 1 point above the record low. Twenty-nine percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 19 percent citing taxes, 21 percent citing regulations and red tape and 16 percent citing weak sales.
Capital Outlays. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 25 percent. Fifty-seven percent reported outlays, down 2 points from January and typical of reports in recent months. The expiration of expensing allowances temporarily boosted spending in December but now readings are back to normal levels of the last year. Overall, this is not an outlook conducive to more capital spending and expansion.
Inventories. The pace of inventory reduction continued, with a net negative 2 percent of all owners reporting growth in inventories (seasonally adjusted), two points lower than January and trending toward balance. Unadjusted, 12 percent reported growth in inventory stocks (up 2 points) and 20 percent reported inventory reductions (unchanged). However, stocks are still considered excessive in spite of this long period of net reductions. The net percent of owners viewing current stocks as “too low” deteriorated 2 points to a net negative 4 percent. This is due primarily to a large deterioration in sales expectations. Consequently, the net percent of owners planning to add to inventory stocks fell 2 points to a net negative 5 percent indicating little appetite to add to stocks in the current environment.
Inflation. Fifteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (up 2 points), and 19 percent reported price increases (up 2 points). Seasonally adjusted, the net percent of owners raising selling prices was a net 1 percent, down point. Overall, there is little evidence that firms are able to raise prices much. Seasonally adjusted, a net 23 percent plan price hikes (up 4 points), a long way from the net 1 percent reporting higher actual prices in recent months. “Wishes” for higher prices are not granted in an economy with a lot of excess capacity.
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