Small Business Economic Trends - October 2013
SUMMARY
OPTIMISM INDEX
Well, a processing error produced a few “interesting” results in the details in the August data such as a surge in job creation plans and major declines in reported sales. But with the correction, most of the 10 Index components were little changed, with the exception of expected business conditions 6 months ahead which gave up 8 points. This could have been a result of the pending government shutdown and the exaggerated political rhetoric spewed into the media, although there was no difference in responses among those received in the first 20 days and the last 10 days of the month.
LABOR MARKETS
Fifty-one percent of the owners hired or tried to hire in the last three months and 41 percent (80 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Reports of workforce reductions have reached normal or sub-normal levels, explaining the favorable levels of initial claims for unemployment. Eleven percent reported reducing employment, the third lowest reading since October, 2007. The other two lower readings occurred this year. But owners report sub-par levels of hiring, so job growth remains anemic even with low levels of initial claims. Twenty (20) percent of all owners reported job openings they could not fill in the current period (up 1 point), a positive signal for the unemployment rate. Fourteen (14) percent reported using temporary workers, down 2 points from August. Job creation plans lost 1 point from August, landing at 9 percent. Housing starts have stalled, just shy of the 900,000 unit mark (although multi-family starts are still solid and provide more jobs per start). Housing is labor intensive and more growth there will provide needed job growth.
INVENTORIES AND SALES
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 negative 6 percent. Seventeen percent still cite weak sales as their top business problem. The net percent of owners expecting higher real sales volumes rose 3 points to 8 percent of all owners (seasonally adjusted. This is good to see as it will take improved sales expectations to trigger hiring and new inventory orders. But it is a bit inconsistent with the large deterioration in expected business conditions. The pace of inventory reduction continued, with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), 2 points worse than August. Unadjusted, 12 percent reported growth in inventory stocks (up 1 point) and 18 percent reported inventory reductions (down up 4 points). For all firms, a net 0 percent (unchanged) reported stocks too low, an historically “satisfied” reading. The net percent of owners planning to add to inventory stocks was unchanged at a net negative 2 percent - a bit inconsistent with the expectation for sales growth.
CAPITAL SPENDING
The frequency of reported capital outlays over the past 6 months rose 2 points to 55 percent. Of those making expenditures, 39 percent reported spending on new equipment (up 1 point), 20 percent acquired vehicles (down 1 point), and 13 percent improved or expanded facilities (unchanged). Five percent acquired new buildings or land for expansion (unchanged) and 12 percent spent money for new fixtures and furniture (up 1 point). Overall, it was a modest increase in capital spending. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 25 percent. Eight percent characterized the current period as a good time to expand facilities (up 2 points).
INFLATION
Fourteen (14) percent of the NFIB owners reported reducing their average selling prices in the past 3 months (down 2 points), and 14 percent reported price increases (down 3 points). Seasonally adjusted, the net percent of owners raising selling prices was 1 percent, down 1 point. Twenty (20) percent plan on raising average prices in the next few months (up 1 point), and 2 percent plan reductions (down 1 point). Seasonally adjusted, a net 19 percent plan price hikes, up 1 point. On Main Street, there is little evidence of inflation, no surprise with such week sales and prospects.
EARNINGS AND WAGES
Earnings trends worsened a bit in September, falling 2 points to a negative 23 percent. At the same time, the Fortune 500 is posting record high profits. Three percent reported reduced worker compensation and 20 percent reported raising compensation, yielding a seasonally adjusted net 17 percent reporting higher worker compensation (up 2 points). A net seasonally adjusted 13 percent plan to raise compensation in the coming months, up 1 point. Overall, the compensation picture remained at the higher end of experience in this recovery, but historically weak for periods of economic growth and recovery, consistent with the macro reports about weak growth in income and compensation. With a net 17 percent raising compensation but only a net 1 percent raising selling prices, profits will continue to be under pressure.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, up 1 point from August. Twenty-eight (28) percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 18 percent citing taxes, 24 percent regulations and red tape and 17 percent citing weak sales. Thirty (30) percent of all owners reported borrowing on a regular basis, up 2 points and historically very low. A net 5 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 1 point from August. The average rate paid on short maturity loans was 5.8 percent, about where it has been stuck for years. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 7 percent, 1 point better than August but a favorable reading in this recovery.
COMMENTARY
The Optimism Index was basically unchanged, giving up two-tenths of a point, statistical noise. The only interesting change in the components was an 8 point deterioration in expectations for business conditions over the next six months. And why not, prospects for Washington “getting it right” are low. The Federal Reserve will persist, even though there is little evidence that they are improving employment. This creates heightened concerns for how their portfolio will be “managed”. The Federal Reserve is buying the equivalent of the Treasury issuance of debt to finance the deficit, not a promising situation. There isn’t much evidence that buying a trillion dollars-of bonds is improving employment. However, one can always argue the counter-factual, that without QE, employment growth would have been even worse. Certainly the rich would be poorer and big banks would have made less. But that’s not what monetary policy should be about. Fiscal policy? What a mess. No budget for years, sequester is now built-in...this is certainly not the way to run the largest enterprise in the world.
Consumers and small business owners are pessimistic, not expecting a “crash” in the economy, just accepting the notion that growth is going to be sub-par and that their government is likely to continue in dysfunctional mode. The misstatements and exaggerations and distortions being sold to the public are stunning, but after all, these are politicians. A desperation deal will likely evolve, and it will be poorly constructed and conceived as usual. This is a “game of thrones” indeed, and no one is really concerned about the peasants, the politicians just want to make their points.
This survey was conducted in September 2013. A sample of 3,938 small-business owners/members was drawn. Seven hundred seventy-three (773) usable responses were received – a response rate of 20 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2013, the NFIB retains ownership. All Rights Reserved.
