NFIB April 2016 Report: Small Business Optimism Increases One Point in April

Bill Dunkelberg

Index of Small Business Optimism rose 1 point in April to 93.6, but owners still cannot find qualified workers to fill open positions and cite a poor economy and the political climate as their two main reasons for not expanding, according to the National Federation of Independent Business’ (NFIB) monthly economic survey released today.

“Despite a gain in NFIB’s optimism reading, small business owners remain extremely pessimistic about the economy, and rightfully so,” said NFIB Chief Economist William C. Dunkelberg. “It was a relief to see the Index turn up, ending a long string of declines.  However, it’s still down from December 2014 when the Index hit an expansion high of 100.”  

The overall Index of Small Business Optimism rose 1 point in April and now stands at 93.6, which is still well below the 42-year average of 98.  Five of the 10 Index components posted a gain, four were unchanged, and one posted a small decline.  The biggest increase in the Index was owners reporting that they had job openings that were hard to fill.  This suggests that not only are labor markets tightening, but owners cannot find qualified workers to hire. The political climate continued to be the second most frequently cited reason for why owners think the current period is a bad time to expand. Small business owners who expect business conditions to improve in the next six months was the only component to decline and now sits at a -18 percent. 

“There is no leadership in Washington, no articulations of a path to a better future, and no evidence that policy-making is focused on promoting economic growth or job creation,” Dunkelberg continued.  “The prospects that strong, unifying leadership will emerge after the election also appears to be poor.”  

Dunkelberg noted that the University of Michigan’s Consumer Sentiment Index posted another decline, offering no hope for small business owners that spending will increase.  

“Overall, there is no exuberance to be found in the economy and small business owners will just continue to plod along,” he said. 

NFIB’s monthly Small Business Economic Trends survey is based on a monthly survey of small businesses. The survey was conducted in April and reflects the response of 1644 small businesses.

Fifty-three percent reported hiring or trying to hire (up 5 points), but 46 percent reported few or no qualified applicants for the positions they were trying to fill. Hiring activity increased substantially, but apparently the “failure rate” also rose as more owners found it hard to identify qualified applicants. Twelve percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, unchanged from earlier months and a high reading for this recovery period. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 4 points, revisiting the highest level for this expansion. Thirteen percent reported using temporary workers, up 3 points. A seasonally adjusted net 11 percent plan to create new jobs, up 2 points from March.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved by 2 points to a net negative 6 percent, a poor reading even if improved. Eleven percent cited weak sales as their top business problem, down 2 points. Overall, this is not a strong sales picture, although slightly better than March. Seasonally adjusted, the next percent of owners expecting higher real sales volumes was unchanged at a net 1 percent of owners, a weak showing. This is well below the average 14 point reading in the first three months of 2015.

The net percent of owners reporting inventory increases improved 2 points to a net negative 5 percent (seasonally adjusted), a weak reading. The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 5 percent. The net percent of owners planning to add to inventory increased 2 points to a net 0 percent. These weak inventory investment readings are consistent with the rather dismal view owners have about future sales and economic progress.

Sixty percent reported capital outlays, up 1 point. Overall, capital spending reports were more frequent but there was little new strength in spending. The percent of owners planning capital outlays in the next 3 to 6 months remained unchanged at 25 percent. Seasonally adjusted, the net percent expecting better business conditions fell 1 percentage point to a net negative 18 percent. The seasonally adjusted net percent expecting higher real sales was unchanged at 1 percent of all owners, not very strong. Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment.

In spite of the Fed’s best efforts to generate inflation for the past seven years (an event most consumers would not want), inflationary pressures remain dormant on Main Street. Seasonally adjusted, the net percent of owners raising selling prices was negative 1 percent, after three months at a negative 4 percent. More evidence that the Fed’s policies aimed at producing inflation are not working. Seasonally adjusted, a net 16 percent plan price hikes (down 1 point). Prospects for a resurgence of inflation are low, and that’s a good thing.

A seasonally adjusted net 24 percent of owners reported raising worker compensation, up 2 points. The net percent planning to increase compensation fell 1 point to a net 15 percent. Overall, the percent of owners reporting that they raised worker compensation remains high for this recovery while the net percent of owners raising prices remains negative, indicating that these costs are not being passed on to customers. Earnings trends actually improved 3 points to a negative 19 percent reporting quarter on quarter profit improvements.

Four percent of owners reported that all their borrowing needs were not satisfied, 2 points above the record low reached in September 2015. Thirty-one percent reported all credit needs met (unchanged), and 52 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. Twenty-nine percent of all owners reported borrowing on a regular basis, down 3 points. The average rate paid on short maturity loans increased 50 basis points to 5.7 percent. Loan demand remains historically weak, owners can’t find many good reasons to borrow to invest when expectations for growth are not very positive. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, unchanged from March. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending.

After logging a disappointing 1.4 percent growth rate in the fourth quarter, the preliminary growth estimate for the first quarter this year was 0.5 percent. The capital stock of the U.S. is barely producing more output even with population growth of nearly 1 percent annually. Yet the valuation of these assets is at record high levels as is the market valuation of bonds, thanks to the efforts of the Federal Reserve Bank. This is a contradiction that begs to be resolved, either by a significant growth in output or a decline in the valuation of these assets. The Fed seems inclined to try to prevent this, targeting financial markets (wealth effects) rather than the real economy. Interest rates are more than low enough, but expected “cash flows” in the numerator are weak, as reflected in the weak optimism expressed by business owners and supported by Fed inaction.

The Federal Reserve continues to send out a message of economic weakness, indicating that the economy is too weak to be able to handle a 25 basis point increase in the Federal Funds rate. This reinforces the uncertainty felt on Main Street and supports the reluctance to spend and hire reflected in the NFIB measures. The Fed has been trying for years to reach its targets of “maximum employment” and 2 percent inflation without success. There is no cheerleader for the economy.
Measures of consumer optimism are also weak, offering no hope of significant gains in spending as the savings rate increases. There is no exuberance to be found, a flatness in optimism pervades the economy, consistent with the plodding growth characterizing this recovery.

There is no leadership in Washington, no articulation of a path to a better future, no evidence that policy-making is coordinated or focused on promoting growth or job creation. Important government institutions are mired in scandal and inaction, voters have lost confidence (20 percent of consumers think government policy is “good”, 41 percent think it is “poor”). The prospects that strong, unifying leadership will emerge after the election appear to be poor.

Bill Dunkelberg is chief economist of the National Federation of Independent Business (NFIB).

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