March 2014 Small Business Optimism Index Above Expectations

Econintersect: The National Federation of Independent Business (NFIB)’s March 2014 monthly optimism index improved from 91.4 to 93.4. The market was expecting the index between 90.5 to 93.2 with consensus at 92.4.

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

Overall, the March gain more or less reversed the February decline. While the Index still can’t seem to get above 95, we can be encouraged that the economy is at least crawling forward and not heading in reverse. The outlook for real sales gains accounted for about half of the improvement with inventory satisfaction and inventory investment plans accounting for most of the rest. However, throughout this recovery we’ve seen these types of increases only to have them go nowhere. As long as Washington continues to ignore policies that could restore the middle class, job creation will continue to be sub-par.

Report Commentary:

First quarter GDP growth is looking pretty slow at just under 2 percent. Weather, trade deficits, and pessimistic consumers and business owners are all taking a toll on spending growth. Uncertainty remains elevated. Consequently, hiring will remain muted compared to previous expansions. There is lots of talk about this looking more like a “new normal”, that the nature of job requirements changed dramatically in the recession. Certainly firms trimmed all the fat and then some in the last 6 years, but technological change wasn’t that dramatic since 2008. Many of the “long term unemployed” would find jobs in an economy with 500,000 more housing starts and a consumer base more willing to spend on services. Washington is floundering and the economy is following suit.

The President is pushing for a 39 percent increase in the minimum wage to address income inequality, to stimulate the economy and help the poor. None of this will occur as jobs will be lost according to a mountain of research and the CBO’s recent report). Certainly not much stimulus there, and most of the increased wage payments will go to families well above the poverty level which is no help for the poor. In addition to fewer jobs, prices will increase to cover the higher labor costs as owners will be paying more for the same work with no extra output. So for every dollar a minimum wage worker receives, it will come out of the pockets of the customers they serve, no increase in spendable income overall. In 2000, firms paid more than the minimum wage to fast food workers because demand was strong and workers generated sales that justified the higher pay. When demand fades, workers can earn less but have a job – unless the minimum wage compels the employer to fire the worker.

The President’s budget contains a billion dollars for “climate change” while the unemployment rate is 6.7 percent and millions can’t find work. The policies that could restore the middle class status of millions by providing job opportunities are not pursued. This will insure that growth and job creation continue to be sub-par.

Some other highlights of this Optimism Index include:

Labor Markets. NFIB owners increased employment by an average of 0.18 workers per firm in March (seasonally adjusted), an improvement over February’s 0.11 reading and the sixth positive month in a row. There could be some weather effects still in the data, but some of the best job producing areas, the Southwest and West and Florida, did not have weather problems. As spring rolls in, a better picture of the underlying strength of our labor markets will be revealed. The remaining 77 percent of owners made no net change in employment. Forty-nine percent of the owners hired or tried to hire in the last three months and 41 percent reported few or no qualified applicants for open positions. Twenty-two percent of all owners reported job openings they could not fill in the current period (unchanged). Thirteen percent reported using temporary workers, unchanged from February. Job creation plans softened further in February, falling 2 percentage points to a seasonally adjusted net 5 percent (compared to 12 percent in January).

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 6 percent. With more firms experiencing lower sales than higher quarter over quarter, the weakness in sentiment is no surprise. Fourteen percent cite weak sales as their top business problem, high but approaching levels experienced in “normal” times. Expected real sales volumes posted a strong 9 point gain, rising to a net 12 percent of owners. A solid improvement even though views about future business conditions remained very negative. While still a historically weak reading, it is one of the very best in this recovery, which has been tepid for years.

Earnings and Wages. Earnings trends improved 3 points to a net negative 24 percent (net percent reporting quarter to quarter earnings trending higher or lower). Rising labor costs are keeping pressure on earnings. Two percent reported reduced worker compensation and 25 percent reported raising compensation, yielding a seasonally adjusted net 23 percent reporting higher worker compensation (up 4 points), the best readings since 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months, unchanged from February and the strongest reading since 2008 as well. The reported gains in compensation are now solidly in the range typical of an economy with solid growth. Hopefully this is a good sign. With a net 23 percent raising compensation but a net 9 percent raising selling prices, it is easy to see why profits remain under pressure. The issue is how much of the gains are in benefits rather than take-home pay.

Credit Markets. Credit continues to be a non-issue for small employers. In March only 5 percent of owners reported that all their credit needs were not met, 1 point above the record low. Thirty percent reported all credit needs met, and 48 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 21 percent citing regulations and red tape and 14 percent citing weak sales.

Inventories. The pace of inventory reduction picked up speed, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted), 4 points lower than February. Reductions are good if in response to strong sales, but not so good if it is in response to weak sales. Owners are satisfying orders with existing inventory but not ordering new stocks. The net percent of owners viewing current inventory stocks as “too low” rose 4 points to a net 0 percent, a positive development. Sales trends did improve a bit, although remained historically weak and probably not enough to substantially reduce inventories. The strong improvement in expected real sales (above) may have produced a more favorable assessment of current stocks (too low) and the need to rebuild. The net percent of owners planning to add to inventory stocks rose 6 points to a net 1 percent, a positive for new orders for inventory.

Inflation. Twelve percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 3 points), and 23 percent reported price increases (up 4 points). Seasonally adjusted, the net percent of owners raising selling prices was a net 9 percent, up 8 points. Only 3 percent plan reductions (unchanged), far fewer than actual reported reductions. Seasonally adjusted, a net 19 percent plan price hikes (down 4 points). If successful, the economy may see a bit more “inflation”.

Steven Hansen

source: NFIB