NFIB Report May 2016: Small business optimism rises modestly in May

Bill Dunkelberg

The Index of Small Business Optimism rose two tenths of a point in May to 93.8, a negligible increase showing no real enthusiasm for making capital outlays, increasing inventories, or expanding, according to the National Federation of Independent Business (NFIB).

“The bottom line is that without an empowered small business sector, the economy will grow at a mediocre pace,” said NFIB Chief Economist Bill Dunkelberg.  “Politicians in Washington credit any insignificant growth in the economy to their policies, but realistically, it’s the increase in the population. At this point, we should expect the same slow growth for the rest of the year.”   

At 93.8, the Index remains well below the 42-year average of 98. Four of the 10 Index components posted a gain, four declined, and two were unchanged. The biggest increase was Expected Business Conditions, which rose five points, a good sign but still nine percentage points below last year’s reading. 

Owners are still reporting that they cannot find qualified workers and cite it as their fourth “Single Most Important Business Problem.”  Earning trends among small businesses fell another point and sits at a dismal reading of negative 20. The political climate continues to be the second most frequently cited reason for why owners think the current period is a bad time to expand.

“Almost every month the administration announces another big regulation that makes it harder to run a business,” said Juanita Duggan, NFIB President and CEO.  “Mix in the presidential election, which is a wild card, and weak sales, and it’s easy to see why small business owners are reluctant to make big bets right now.”  

NFIB’s monthly Small Business Economic Trends survey is based on a monthly survey of small businesses. The survey was conducted in May and reflects the response of 700 small businesses.

Fifty-six percent reported hiring or trying to hire (up 3 points), but 48 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. Thirteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, #4 on the Most Important Problem list. Twenty-seven percent of all owners reported job openings they could not fill in the current period, down 2 points, but historically strong. Fifteen percent reported using temporary workers, up 2 points from April, 5 points from March. Overall, it appears that labor markets are tightening. A seasonally adjusted net 12 percent plan to create new jobs, up 1 point 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 deteriorated 2 percentage points to a net negative 8 percent, a poor reading and reflective of weaker consumer spending in Q1. Fourteen percent cited weak sales as their top business problem, up 3 points from April. Overall, this is not a strong sales picture. 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 deteriorated 1 point to a net negative 6 percent (seasonally adjusted), a weak reading. The net percent of owners viewing current inventory stocks as “too low” improved a point to a net negative 4 percent. The net percent of owners planning to add to inventory decreased 1 point to a net negative 1 percent. These weak inventory investment readings are consistent with the rather poor performance of consumer spending in the first quarter, leaving owners with excessive stocks and no incentive to add to them.

Fifty-eight percent reported capital outlays, down 2 points. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 23 percent. Seasonally adjusted, the net percent expecting better business conditions increased 5 percentage points to a net negative 13 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.

Gas prices are up 15 percent so far this year as oil prices rebound from very low levels. However, this will not be sufficient to get the Fed’s preferred inflation measure over the 2 percent goal they have set. Inflationary pressures remain dormant on Main Street. Seasonally adjusted, the net percent of owners raising selling prices was up 2 points from April to 1 percent, after five months in negative territory, three of them 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 (unchanged). Prospects for a resurgence of inflation are low, and that’s a good thing (contrary to Fed efforts to create inflation).

A seasonally adjusted net 26 percent of owners reported raising worker compensation, up 2 points. The net percent planning to increase compensation was unchanged at a net 15 percent. The survey does not distinguish between changes in wages and changes in benefits, including health insurance. 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 near zero, indicating that these costs are not being passed on to customers. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem rose a point to 13 percent, number 4 on the list of problems behind taxes, and regulations and red tape and weak sales. Earnings trends deteriorated a point to a net negative 20 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 1 percent reported that financing was their top business problem compared to 23 percent citing taxes. Twenty-nine percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans fell 40 basis points to 5.3 percent. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, unchanged from April.

Federal Reserve Chair Yellen and her minions are now talking the financial markets into believing that a rate hike is in the offing. According to market indicators, there is a 40 percent probability for a June hike and a 60 percent probability for July, up from 4 percent before the campaign began. However, these estimates have likely changed in light of the most recent BLS numbers. But the message is the same, rates will go up a whole 25 basis points IF the economic data support it. Well, what does that tell us? Nothing. It’s obviously true, a tautology. What we never know is which data and how good, quantitatively, must it look? What exactly is 

“maximum employment”, what measures tell us we have arrived? Maybe the leading indicator is how many Fed officials are making speeches with the line “rates will go up soon IF the data support it”. Fed equivocating has been a major source of the growth-suppressing uncertainty that clouds private decision-making for the REAL economy, not financial markets. When it happens, don’t expect the “needle” to move much.

Second quarter GDP growth is looking better, then again, 0.8 percent is not much of a hurdle to get over. Preliminary forecasts from the NY and Atlanta Federal Reserve banks range from 2.9 to 2.2 percent growth from a weak Q1 base (Q4 was weak as well). That would be a return to the 
“normal” sluggish growth for this expansion. If this is the new “full employment”, it is easier to explain our weak real investment numbers, we still have excess capacity to deliver the goods and services consumers want (or can afford with slow pay growth), so a lot of potential new investment is not “profitable” to undertake. Capital spending on Main Street has been subpar throughout the entire expansion and remains so. There has been restrained borrowing and restrained capital spending. The big firms are just repurchasing shares (at record high prices!).

A year ago, only 16 percent of consumers thought the government was doing a good job with economic policy (University of Michigan). Now, 23 percent think so, an improvement of sorts, but nearly 40 percent characterize policy as poor, basically unchanged. Optimism improved, reaching its highest level since January of 2015, reversing an 11 month 9 point slide in Optimism through April. The percentage expecting their finances to improve reached its highest point in 10 years. Improved credit was supporting spending. Perhaps this will translate into improved consumer spending, but it has yet to show up on Main Street.
Bottom line, we can’t get “3%” growth without an empowered small business sector and right now we don’t have one. Obamacare, the avalanche of regulations (federal, state and local), taxes, and a management team in Washington that can’t get anything done insure mediocre growth which to a significant degree depends on population growth, not under the control of our politicians.

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

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