NFIB Weakness And Recession Risks
Each month the National Federation of Independent Business releases their survey of their members which range from very small to large scale independent businesses. The recent release for June was anything but positive. The index declined 3 points in June, falling to 91.4 which is the lowest level since October of 2011. The decline is significant and relinquished all the "weather related" gains that we warned about earlier this year and is a clear indication of slowing economic growth.
The 10 Index questions lost a total of 30 percentage points in net favorable responses and what was most concerning was the sharp increase in "poor sales" as the number one concern of businesses. The continued lack of aggregate end demand continues to keep businesses on the defensive and impacts employment. Furthermore, the "uncertainty factor" of the recent SCOTUS decision on health care will likley show up in the July survey putting even more downward pressure on future plans for employment, expenditures and planning. With over 20 new taxes (totaling roughly $800 billion) the unknowns of costs and regulations (most of which have not even been written yet) are clearly not business friendly.
The recent increases in jobless claims and weak employment, which we have warned over the past several months would be the case, have shown up markedly. Nowhere is this seen more clearly than in this report. Forty-four (44%) percent of the owners hired, or tried to hire, in the last three months and 33% reported few, or no, qualified applicants for positions. These figures suggest that job creation has been very weak. Furthermore, the percentage of firms reporting increases in employment remain well below normal levels.
This data aligns with the recent employment report from the BLS where we noted that nearly 3/4s of the increase in jobs last month were “part-time for economic reasons.” This is clearly not a sign of a strong, or recovering, labor market. The survey showed that the net percentage of owners planning to create new jobs fell 3 points to 3%, an unfortunate reversal of three months of improved readings. This is definitely not typical of an expansion but aligns well with the concerns over the economy and poor sales.
As stated previously, "poor sales", ranked the number one concern of businesses in the most recent survey. Not surprisingly there is a very high correlation between the "sales" and "employment." It is not surprising that with the negative trend of economic reports that we have witnessed over the past couple of months that the outlook of businesses whether this is a "good time to expand" has fallen sharply. With a weakening economic picture, and a lack of end demand in sales, is it really surprising to see businesses moving back into defensive positions?
In a real concern for second quarter earnings' season, of which we have just started to get into, the report of positive earning's trends plunged 7 points, falling to a negative 22% in June. While the unseasonably warm winter artificially boosted profit trends earlier this year the reality of a weak economy is rapidly setting in.
The last chart is the most interesting and concerning. The STA Economic Output Composite Index is composed of several Fed district manufacturing reports, CFNAI, ISM Composite, Chicago ISM and the NFIB survey. Whenever the index has historically sank below 30 the economy was either in, or about to be in, a recession. This was an unblemished record back to 1974 until the combination of Operation Twist and Long Term Refinancing Operations bailed the economy out of danger last year. Currently, the index is at 28.16 and is signaling a very weak economy on the verge of recession.
Without further stimulative support from the Fed or the ECB the recession will likely be in a recession by the end of 2012 or the beginning of 2013. The economic trends are deteriorating very quickly as the recession in Europe impacts domestic economics as witnessed by the very negative earnings related announcements by economically sensitive companies such as Fed Ex, Nike, Proctor and Gamble, Caterpillar and Cummins.
From the NFIB Report: "The rumored hiring of thousands of IRS agents to enforce the health care rules will certainly add to employment and Gross Domestic Product (GDP) since our accounting rules simply assume that the value of the output produced by a government worker is equal to their wage. An equal number of workers using their personal savings to produce a new services that did not sell would add nothing to GDP as no sales were registered and no income received. Job creation will be very weak in June and plans for July look even worse, so there will be very little progress on the jobs front in the coming months. No inflation issue on Main Street and there is nothing the Federal Reserve can do to increase employment. Rates are as low as they have ever been and more reductions will not help, but the promise of more action by the Federal Reserve will keep Wall Street busy and appease Congress.
The economy definitely slowed mid-year, not a huge recession threat but slower than earlier in the year. Job growth will be far short of that needed to reduce the unemployment rate unless lots of unemployed leave the labor force. NFIB members didn’t add a lot of jobs and don’t plan to in the coming months. Capital spending and inventory investment also weakened. Expectations for improvements in sales and business conditions faded, so no reason to hire additional workers or buy new inventory. 'Political uncertainty' remained historically high as the reason why the current period is not a good time to expand."
All I can say with this latest report is "I Warned You." The overall report is a very definite sign of economic deterioration among the group of people that make up 70% of overall job creation. Without jobs the economic recovery, without further stimulative support, is largely at risk as is the nascent housing recovery that everyone hopes has arrived. We could be in for a disappointment.