Small Business Economic Trends — August 2014
The Index of Small Business Optimism rose 0.7 points in July to 95.7, not a “4 percent” GDP month for sure. There was little change in the 10 Index components other than outlook for expansion and business conditions which accounted for the small gain in the Index. Even though these improved, they remain historically low.
NFIB owners increased employment by an average of 0.01 workers per firm in July (seasonally adjusted), the tenth positive month in a row and the best string of gains since 2006. Seasonally adjusted, 13 percent of the owners (up 1 point) reported adding an average of 2.9 workers per firm over the past few months. Fifty-three percent of the owners hired or tried to hire in the last three months and 42 percent (81 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Twenty-four percent of all owners reported job openings they could not fill in the current period, down 2 points, but a solid reading. Fifteen percent reported using temporary workers, up a point. Job creation plans continued to strengthen and rose 1 percentage point to a seasonally adjusted net 13 percent, the best reading since September 2007. On a seasonally adjusted basis, job creation plans improved and job openings held at a solid level. Actual job creation remained positive, although modestly so.
INVENTORIES AND SALES
The pace of inventory reduction was steady, with a net negative 3 percent of all owners reporting growth in inventories (seasonally adjusted). So, on balance, more firms are reducing inventory than building stocks. The net percent of owners viewing current inventory stocks as “too low” worsened 1 point to a net negative 3 percent, mild dissatisfaction which will depress inventory investment. The net percent of owners planning to add to inventory stocks rose to a net 0 percent. While inventories have been building solidly at the national level, it appears that the small business sector is adding little to the accumulation of stocks reported in the GDP accounts and sales are too weak to produce much liquidation.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months fell 1 point to a net negative 3 percent, still one of the very best readings since 2007. Thirteen percent cited weak sales as their top business problem, one of the lowest readings since December, 2007, the peak of the expansion. Expected real sales volumes posted a 1 point decline, falling to a net 10 percent of owners expecting gains. Overall, these readings are more like a recession period than one of expansion.
Fifty-five percent reported outlays, up 1 point from June and typical of reports in the recovery. The percent of owners planning capital outlays in the next three to six months rose 1 point to 23 percent. Ten percent characterized the current period as a good time to expand facilities, up 3 points but still low for a period of growth. The net percent of owners expecting better business conditions in six months rose 4 percentage points to a negative net 6 percent, not a very encouraging reading. Overall, owner expectations do not signal a very positive outlook.
Seasonally adjusted, the net percent of owners raising selling prices was a net 14 percent, unchanged from June and 15 percentage points higher than December. Twenty-three percent plan on raising average prices in the next few months (up 1 point). Only 3 percent plan reductions (unchanged), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 22 percent plan price hikes. If owners continue to be successful, the economy will see a bit more “inflation” as the price indices seem to be suggesting.
PROFITS AND WAGES
Earnings trends were unchanged at a net negative 18 percent, one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, but there appears to be an improvement in profit trends in place, even if not historically strong. A seasonally adjusted net 21 percent reporting higher worker compensation, unchanged and the second best reading since the first quarter of 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months (up 1 point). The reported gains in compensation are now solidly in the range typical of an economy with solid growth - another confusing signal about the economy.
Six percent of the owners reported that all their credit needs were not met, unchanged and only 2 points above the record low. Thirty percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem. Thirty percent of all owners reported borrowing on a regular basis, up 2 points, typical of the expansion readings and historically near a record low. A net 5 percent of regular borrowers reported loans “harder to get” compared to their last attempt, near the record low. The average rate paid on short maturity loans was unchanged at 5.6 percent. The Federal Reserve policy has not been able to substantially lower the average rate paid by small firms for the past several years. Most if not all banks have set floors on acceptable loans, unwilling to make long term commitments at interest rates known to be artificially low and expected to rise.
Job growth was anemic in July with 209,000 as a first guess by the BLS. But the media rejoiced calling it “not too hot, not too cold”, just right for the Federal Reserve and the stock market. Really? Well, financial markets don’t want a hot economy because interest rates will rise causing asset values fall. But the unemployment rate went up, not down although some excuse this as typical in a recovery when more re-enter the labor force. Total hours worked by all these workers barely increased. The Index of Total hours rose from 100.8 to 101.0, 2007=100. So, the total number of hours worked is virtually the same as in 2007, seven years later and after five years of “expansion”. Gains in part-time employment, offset by losses of full-time workers is not a good model for economic growth.
Clearly the stats are not acceptable to the Board of Governors, which recently reasserted the view that significant “accommodation” was still needed, this in spite of the volumes of empirical results that suggest that even historically low rates of interest aren’t enough to move the employment needle much if at all.
The denominator in the valuation model is as low as it can be. But it’s the numerator, expected profits and cash flow that is being crippled by current policies and high levels of uncertainty. A third of the owners who view the current period as a bad time to expand blame the political environment.
Year over year, GDP growth is running about 2.5 percent, been here, done that for too long now. Looking at the NFIB survey results for July, there is no evidence that economic activity is picking up in early Q3. Only job creation plans and job openings have reached growth levels from a historical perspective. But the actual reported job creation, though positive, is not strong. And capital spending and inventory investment both remain weak. Unfortunately, Q3 looks like more of the same.
This survey was conducted in July 2014. A sample of 10,799 small-business owners/members was drawn. One thousand six hundred and forty-five (1,645) usable responses were received – a response rate of 15 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
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