December 2015 NFIB Report: Small business owners sending mixed signals on economy as POTUS readies his final State of the Union address

Bill Dunkelberg

The Index of Small Business Optimism rose 0.4 points in December, increasing to 95.2. The Index is stuck in a “below average” rut, characterizing the performance of the small business sector. Historically accounting for about half of private GDP, below average growth for small businesses has not been offset by strong growth in large firms. Combined, they are producing 2.5 percent growth overall. With the manufacturing sector in decline, large firms aren’t likely to add as much to growth in 2016. Auto sales have been strong, but will likely fade in 2016. The service industry has also grown with solid spending in health care, so health insurance costs will likely also rise, an unfortunate outcome for small business owners. 

Reported job creation faded a bit in December, with the average employment gain per firm falling to -0.07 workers from .01 in November, basically flat for the last few months. Fifty-five percent reported hiring or trying to hire (unchanged), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Fifteen percent reported using temporary workers, down 1 point. Twenty-eight percent of all owners reported job openings they could not fill in the current period, up 1 point and at the highest level for this expansion. This is a solid reading historically and indicates no significant change in the unemployment rate. A seasonally adjusted net 15 percent plan to create new jobs, up 4 points, a nice gain, possibly driven by the surge in expected real sales gains.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a net negative 5 percent. Eleven percent cited weak sales as their top business problem, up 2 points. Overall, this is not a strong sales picture. Expected real sales volumes posted a 9 point gain, rising to a seasonally adjusted net 8 percent of owners expecting gains. This is the best reading in the past 8 months, but well below the average 14 point reading in the first four months of the year. Owners aren’t expecting a very energetic opening to the year, hopefully the December reading is the start of a better trend.

The net percent of owners reporting inventory increases was a net negative 1 percent (seasonally adjusted), a 2 point improvement. The net percent of owners viewing current inventory stocks as “too low” gained 1 point, rising to a net negative 5 percent. Current inventories still look excessive to owners, even with the sharp improvement in expected real sales. The net percent of owners planning to add to inventory was unchanged at a net 0 percent for the third month in a row. With weak expectations for sales and business conditions, owners see no need to add to current stocks.

Sixty-two percent reported capital outlays, unchanged from November. Overall, capital spending was much stronger in November and December, reflecting growing certainty that expensing provisions would be renewed. Not only was it renewed, it was made permanent, giving small businesses some much needed certainty. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 26 percent, not a strong reading historically but among the best in this expansion. Seasonally adjusted, the net percent expecting better business conditions deteriorated 7 points to a net negative 14 percent, a very negative outlook for an “expansion”. Clearly, expectations for the economy are not conducive to an improvement in business investment. Although expectations for real sales gains improved sharply, the December reading is much weaker than those posted in the first half of 2015.

Seasonally adjusted, the net percent of owners raising selling prices was negative 4 percent, down 7 points and the first negative number since 2013. It appears that there was a lot of price cutting late in the year to boost sales and reduce inventory. Seasonally adjusted, a net 20 percent plan price hikes (up 3 points). If history repeats, this will be offset by unplanned reductions in selling prices. Until spending posts a substantial pickup, it will be hard to raise prices. In general, inflation occurs when demand pushes up against capacity, something not likely to occur any time soon.

Earnings trends improved 1 point to a negative 18 percent reporting quarter on quarter profit improvements. Far more owners are reporting profits lower quarter to quarter than higher.

A seasonally adjusted net 23 percent of owners reported raising worker compensation, unchanged from November. The net percent planning to increase compensation was also unchanged at a net 20 percent, historically strong for this recovery. Some of this is showing up in wage gains, not just benefits costs.

Four percent of owners reported that all their borrowing needs were not satisfied, 2 points above the record low reached in September, 2015. Thirty-two percent reported all credit needs met (unchanged), and 52 percent explicitly said they did not want a loan. For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow. Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes. Thirty-one percent of all owners reported borrowing on a regular basis, up 4 points. The average rate paid on short maturity loans rose 30 basis points to 5.0 percent. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, a 2 point deterioration.

The Federal Reserve finally pulled the trigger and raised 25 basis points. Chair Yellen observed that the Fed had not reached its inflation goal of 2 percent based on the PCE deflator or its new goal of “maximum employment” (metrics unspecified). While experts will puzzle over what data would satisfy those criteria, the larger concern is that the Fed has been unable to reach either of its objectives using the tools available to them. Another puzzle, why is the Fed trying to attain 2 percent inflation when inflation by this measure has averaged less than that for decades, an accomplishment that should be celebrated. It looks like a mindless exercise. The goal was set some time ago and the reasons were vague and unclear. But now, the Fed marches toward it regardless, reluctantly leaving zero rates behind. If inflation does hit the 2 percent target, how will policy change?

The December survey results probably came in too early and the sample is small to allow much interpretation as a response to the Fed move. In the same month Congress made permanent expensing and other favorable tax changes that had an immediate impact on bottom lines whereas most borrowers already have their cheap loans. However, prospects for any other substantive policy changes in 2016 are not good. The President appears to be shifting his attention to foreign policy and guns. Congress has a lot of – economic growth supporting legislation under consideration, but most is politically difficult to pass or unlikely to receive Presidential approval. And savings at the pump in 2016 may be offset by losses at the light switch if EPA regulations for power generation are put in force.

The net effect of the changes in monetary and fiscal policy were less than impressive in December as reflected in owner expectations and plans. However, the January survey, mailed January 1st and collected through the month, may provide a clearer picture as owners respond to policy changes enacted. It is unlikely that 2016 will produce any major changes as the politics of the election will suck the oxygen out of serious policymaking.

At 95.2, the Index stands well below its 42 year average of 98 and below its highest levels in this recovery, reached late in 2014 (readings of 98 and 100 in November and December, 2014). Labor market Index components maintained their solid (for this expansion) readings, supporting a continuation of recent job growth experience. Capital spending was solid in November and December, but may be a “one off” response to tax changes effective for spending completed by December 31. Overall, current economic climate is a prescription for a continuation of 2.5 percent growth.

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