Small Business Economic Trends - April 2012
Six monthly gains in the Index of Small Business Optimism were reversed in March, as the index fell almost 2 points to 92.5. Nine of the ten Index components declined, only increasing satisfaction with inventory stocks added one point to the Index computation. It looks like a replay of 2011, a few months look good early on and then it all fades.
The percent of owners reporting hard to fill job openings fell 2 points to 15 percent, the second monthly decline since reaching 18 percent in January, the highest reading since June 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate and indicate that the rate is likely to rise, other things equal. This is reinforced by a four month decline in the net percent of owners planning to create new jobs. March’s net 0 reading was 4 points lower than February and 7 points lower than last November. With a net 0 percent planning to create new jobs, it is hard to be optimistic about job growth.
The frequency of reported capital outlays over the past six months fell 5 points to 52 percent, a reversal of the gains posted in January and February. The record low of 44 percent was reached most recently in August 2010. Twenty-two (22) percent report “poor sales” as their top business problem, unchanged from February. With an outlook like this, fewer owners will bet their hard earned capital on the future. It is too uncertain. The percent of owners planning capital outlays in the next three to six months fell one point to 22 percent. Seven percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point. The net percent of owners expecting better business conditions in six months was a negative 8 percent (down 2 points).
IVENTORY AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months gained a surprising 8 points, rising to a net 1 percent. This is the best reading since December 2007, the peak of the last expansion. The net percent of owners expecting higher real sales lost 4 points, falling to a net 8 percent of all owners (seasonally adjusted). A net negative 9 percent of all owners reported growth in inventories (seasonally adjusted), 9 points worse than February. For all firms, a net 3 percent (up 1 point) reported stocks too low, one of the most positive reports in 37 years. Overall, it appears that small business owners have reduced inventories to acceptable levels given the outlook for sales growth. Without improved sales, there is little motivation to order new inventory. Plans to add to inventories fell 2 points to a net 0 percent of all firms (seasonally adjusted).
Twenty-five percent of the NFIB owners reported raising their average selling prices in the past three months (up 5 points) and 17 percent reported price reductions (up 1 point). Seasonally adjusted, the net percent raising selling prices was 6 percent, up 5 points from February. The Federal Reserve is counting on low inflation to bolster its position that current policy is appropriate for the next year or two. Overall, price hikes were quite pervasive as owners respond to rising input costs (labor and materials) and try to pass those costs on to customers. Twenty-six (26) percent plan on raising average prices in the next few months, 4 percent plan reductions. Seasonally adjusted, a net 21 percent plan price hikes, up 2 points. Price cutting appears to be fading and this will put upward pressure on the inflation measures.
EARNINGS AND WAGES
Reports of positive earnings trends lost 4 points in March, falling to a net negative 23 percent. Not seasonally adjusted, 14 percent reported profits higher (down 2 points), and 43 percent reported profits falling (up 4 points). Profits are the source of capital to grow small firms since they can’t sell shares to shareholders to provide new capital, so this decline in profit trends is not a welcome development. Six percent reported reduced worker compensation and 20 percent reported raising compensation, yielding a seasonally adjusted net 14 percent reporting higher worker compensation, the highest reading in 39 months. A net seasonally adjusted 9 percent plan to raise compensation in the coming months, a 3 point decline from February.
Financing remained low on the list of concerns for business owners. Only 3 percent cited financing as their top business problem, compared to 20 percent citing taxes, 19 percent unreasonable regulation and red tape and 22 percent citing weak sales. Ninety-two (92) percent reported that all their credit needs were met or that they were not interested in borrowing. Twenty-seven (27) percent reported all credit needs met, eight percent reported that not all of their credit needs were satisfied and 52 percent said they did not want a loan. Thirty-one (31) percent of all owners reported borrowing on a regular basis, down one point from February. A net 11 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 3 points, surprisingly. The average rate paid on short maturity loans was 5.7 percent, stuck at much the same level for years. Rates paid by small business owners are not responding to the Federal Reserve’s efforts to lower them. Three percent of owners reported higher interest rates on their most recent loan, and 3 percent reported getting a lower rate, so overall interest costs are stable. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 11 percent (more owners expect that it will be “harder” to arrange financing than easier), one point worse than February.
The March survey results were bad news, ending what promised to be steady, albeit glacially slow, improvements in the small business sector of the economy. Nothing much happened in March to make owners more optimistic about the future and that seems to be a problem, the status quo. Europe was quiet but somber, uneasy, as if waiting for another shoe to drop. Consumer confidence and spending remains depressed. And health care is in the Supreme Court creating more uncertainty, either way the decision goes.
Inflation pressures are building and reports of rising worker compensation are the highest since 2008. The percent of owners reporting “inflation” (rising costs for inputs) as the #1 business problem are the second most frequent since 2008, the highest since 2008 occurred a few months earlier in 2011. Reports of increases in average selling prices are rising and net 21 percent of the owners plan to raise their selling prices in the coming months.
The March employment numbers were a bit of a surprise and a disappointment. On the establishment survey, one might hypothesize that we hired in January and February a lot of the workers we would have hired in March as the weather improved. This means that we added seasonal adjustments to January and February numbers that were not as low as they usually would be with bad winter weather. So, they looked good. Then March hiring was low because a substantial share of it was done in the prior two months, and the seasonal adjustment couldn’t overcome the advance hiring. In short, the current employment stats are not seasonally typical so the seasonal adjustments mislead us. The pattern of losses in retailing is a puzzle, especially since retail sales growth has been positive, confirmed by the rise in the net percent of owners reporting improving sales trends. This raises a second inconsistency, if employment is doing so well, where is the Gross Domestic Product (GDP) that they are producing? Construction and manufacturing employment are behaving as expected. We make more GDP today than at the peak of the expansion in dollar terms, but there are a million housing starts missing in GDP, replaced by manufacturing output (lots of that being exported). Thus, we are using seven million fewer workers since construction is labor intensive and manufacturing is not.
The NFIB models based on the percent of owners reporting “poor sales” as their top business and on the percent with hard-to-fill job openings and job creation plans have tracked the unemployment rate quite well. If March data were to be the same as the April survey, the forecast would add half a point to the unemployment rate for Q2.
The Federal Reserve has become more active in the media, trying to be more “transparent” about policy but adding little clarity. The basic message is that rates will remain low as long as the economy is weak but no one knows at what point the economy will be deemed strong again by policymakers – creating more uncertainty.
This survey was conducted in March 2012. A sample of 3,938 small-business owners/members was drawn. Eight hundred nineteen (757) usable responses were received – a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.