Econintersect: The National Federation of Independent Business (NFIB)’s October 2014 monthly optimism index improved from 95.3 to 96.1 (96.1 was the August reading). The market was expecting the index between 94.0 to 96.5 with consensus at 96.0. This gain was attributed to a modest increase in the net percent of owners who plan to increase capital spending and more who expect higher sales in the next 3 months.
NFIB reports usually contain blasts directed at Washington by NFIB chief economist Bill Dunkelberg.
Those were the two bright spots [a modest increase in the net percent of owners who plan to increase capital spending and more who expect higher sales in the next 3 months] in an otherwise mixed reading. Owners are making capital investments and trying to fill positions despite that they cannot anticipate a better economy. Basically they’re preparing to taxi the runway but they don’t expect to take off anytime soon. The political class and a fair number of economists have assumed for years that small business is starved for credit. That appears to be an egregious misdiagnosis. Local business owners, for the most part, can borrow all they need but mainly, they’re not interested now in taking on debt because they’re not confident in the future.
Report Commentary from NFIB Chief Economist William Dunkelberg:
Voters and non-voters sent a clear message last Tuesday. For those who voted, most didn’t approve of the status quo. For those who didn’t vote, they weren’t persuaded to endorse any candidate. The question is, how much can the Republicans get done with the President holding his veto pen at the ready. Some of his supporters have counseled him to veto everything the Republican Congress sends his way. That would certainly be bad for the economy. There are over 300 bills sitting in the Senate that were passed by the House over the past 6 years, many by bipartisan majorities. But, if the President won’t negotiate, all Congress can do is pass them and send them to the Oval Office.
In his campaigning, the President touted his economic record. Apparently he and with many of us, can’t remember what “good times” really look like. The economy grew at a surprising 3.5 percent pace in Q3, distinctive in comparison to the 2.2 percent growth recorded to date in this expansion. However, the domestic economy did not enjoy that much strength, with Gross Domestic Expenditures (GDP-Exports) growing only 2.1 percent and consumer spending advancing at a 1.8 percent pace, down from 2.5 percent in the second quarter. Job gains remained mediocre but steady, touted by many as good, but those unemployed since 2007 would not share in the applause. Net exports added 1.3 percentage points to the growth rate great for the big firms, but the latest trade data now indicate a downward revision of 0.5 percentage points. The surge in government spending, mostly in defense, added 0.8 percentage points, but is not likely to repeat next quarter. So the basic domestic economy remained operating in the 2.2 percent growth range, and that’s the economy that matters to small businesses.
It will be interesting to see if there are any “psychological” impacts after the election. Obviously there are about as many disappointed voters as happy ones. But business owners who characterize the current as a “bad time to expand” their business have blamed the “political climate” at elevated rates, second only to blaming the weak economy. It will be interesting to see if this abates in the November survey, and even better, if there are signs of renewed strength in capital spending plans.
Some other highlights of this Optimism Index include:
Labor Markets. Labor markets, although improved, are still sloshy. Seasonally adjusted, 13 percent of the owners (unchanged) reported adding an average of 2.7 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (unchanged) an average of 2.9 workers, producing the seasonally adjusted net gain of 0.0 workers per firm overall. Twenty-four percent of all owners reported job openings they could not fill in the current period, up 3 points, a good sign for improvements in the unemployment rate. Job creation plans improved a point to a seasonally adjusted net 10 percent. Not a lot of strength in these numbers but consistent with steady growth in employment.
Inventory and Sales. The pace of inventory reduction dropped sharply (a 6 point improvement), with a net negative 1 percent of all owners reporting growth in inventories (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” slipped 3 points to a net negative 3 percent, suggesting that stocks are excessive relative to sales expectations. The net percent of owners planning to add to inventory stocks rose a point to a net 3 percent. Overall, not much movement, but with a positive tinge to the picture. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 1 point to a net negative 3 percent, a rather poor picture even if improved. Twelve percent cited weak sales as their top business problem, one of the lowest readings since December 2007, down 2 points. Expected real sales volumes posted a 4 point gain, rising to a net 9 percent of owners expecting gains. Overall, these readings are more like a recession period than one of expansion.
Capital Spending. Fifty-six percent reported outlays, unchanged from September and not an especially strong reading. The percent of owners planning capital outlays in the next 3 to 6 months rose 4 points to 26, the second strongest reading since early 2008 and only a point below the expansion record set in August. The net percent of owners expecting better business conditions in 6 months fell 1 percentage point to a negative net 3 percent, not a very encouraging reading. A net 9 percent of all owners expect improved real sales volumes, up 4 points. Overall not a very positive outlook and not supportive of a boost in capital spending.
Inflation. Thirteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 1 point), and 18 percent reported price increases (up 1 point). Seasonally adjusted, the net percent of owners raising selling prices was a net 8 percent, up 4 points, not a lot of inflation in those numbers. Twenty-three percent plan on raising average prices in the next few months (unchanged). Four percent plan reductions (down 1 point), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 20 percent plan price hikes (up 4 points).
Profits and Wages. Earnings trends deteriorated another point, reaching a net negative 20 percent. Two percent reported reduced worker compensation and 21 percent reported raising compensation (up 2 points), yielding a seasonally adjusted net 19 percent reporting higher compensation, up 1 point, bouncing back from a 4 point decline in September. A seasonally adjusted net 13 percent plan to raise compensation in the coming months (down 2 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, but the reversal was disappointing for employees as it signals weaker labor demand and soft labor markets.
Credit Markets. Four percent of the owners reported that all their credit needs were not met, returning to the historic low. Twenty-nine percent reported all credit needs met, and 53 percent explicitly said they did not want a loan (67 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 22 percent citing regulations and red tape and 12 percent citing weak sales. Eleven percent complained about the availability of qualified labor. Twenty-eight percent of all owners reported borrowing on a regular basis, down 3 points and a record low. The average rate paid on short maturity loans increased 10 basis points to 5.5 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 5 percent; 2 points better than September. Interest rates are low, but prospects for putting borrowed money profitably to work are not great and so loan demand remains weak among small business owners. Low rates have not triggered the growth in spending that would deliver a good cash flow on business investments.
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