NFIB - Dear Administration, Are You Listening?
The National Federation of Independent Business released their monthly small business survey this morning showing a 4th consecutive decline to 91.2 in July from last month's reading of 91.4. Overall, sentiment is deteriorating with the notes from the press release reading like an obituary for the economy: "If it weren’t for population growth, Gross Domestic Product growth would be about zero. More people eat burgers, get haircuts, drive a vehicle, etc. So, 1 percent population growth will support something like a 1 percent growth in spending. And that’s our basic support level. Absent that (as in Japan and Eastern Europe where it’s near zero), growth would be under 1 percent. And the NFIB indicators point to a continuation of just that kind of growth."
That is a very strong statement but also correct. This is a topic that we have discussed in the past about the employment numbers. Current levels of employment growth are not keeping up with growth in the civilian working-age population. This has the ramification of forcing more individuals onto food-stamps and government welfare programs as these individuals, as the NFIB stated, still have to eat and live.
From the report: "Just for perspective, compare some of this July’s numbers to 2000, arguably the best economy in history, with 64.5 percent of the adult population employed. A record 70 percent reported capital spending in the prior 6 months in the January, 2000 survey compared to 54 percent today. The percent of owners with a job opening peaked at 34 percent in 2000 compared to 15 percent today. A record 19 percent planned to create new jobs late in 1999 compared to 5 percent today. Twenty-eight (28) percent of the owners thought it was a good time to expand (December 1999) compared to 5 percent today. And this is after three years of (alleged) expansion."
You can clearly see in the chart above that the survey is still clearly well entrenched in recessionary levels which is why employment remains a structural mess. What is very important, and often overlooked, is that employment growth is the key to economic recovery. Individuals must be able to produce so that they can consume at higher levels. Higher levels of consumption create demand on businesses which encourages them to produce more requiring more employment. It is this cycle that causes the economy to grow, however, without employment to kick start that growth cycle the economy will remain mired in a recessionary environment demanding continued government support to combat deflationary pressures.
What is painfully clear is that the current Administration has no understanding of what fosters economic growth or employment. "But still, with all the data showing painfully slow economic growth, the Administration continues to promote increases in taxes and regulatory costs. Some 'experts' argue that the marginal rates don’t matter to hiring and real investment spending and that there is no uncertainty, at least that impacts economic activity. We teach differently in our business schools and economics courses, uncertainty is a core concept in our business theories and models and there is considerable empirical support for the adverse impact of uncertainty on decision making. It would help immensely if they took a course or two."
This sentiment is clearly reflected in the top 3 concerns of small businesses which make up more than 70% of the employment in the U.S. Uncertainty about where taxes will be in the years ahead make it difficult to plan. ObamaCare will significantly increase payroll and benefit costs to businesses, which is by far their largest expenditures, leading them to remain defensive in order to protect profitability. Profitability has been impacted by "poor sales" as lower employment levels, stagnant wage growth and tight credit has kept the consumer sidelined. Government regulations and "red tape" increase costs of operations on businesses which negatively affects profitability. Unfortunately the current Administration, which touts that they saved the automobile industry single-handedly, fails to listen to what the bulk of American businesses are saying.
The chart showing the percentage of firms expecting the economy to improve within the next six months remains at levels that are normally associated with the onset of recessions. It is only logical that if businesses are "uncertain" about the economy in the months ahead that they would remain more tentative about hiring or spending. As the NFIB noted above, while there are many "experts" that dismiss the idea that the "uncertainty principle" is holding the economy back it - the evidence quite clearly points to the contrary.
Furthermore, it is not just expectations of economic improvement that is holding the economy back. While employment is a critical component in getting the consumption part of the economic equation moving in the right direction - it is capital spending that moves the business investment component.
In the most recent report the plans for capital expenditures in the next 3-6 months remained at 21 down from 25 in April. As with every other indicator in the overall report plans for capital expenditures remains at very weak levels implying continued economic malaise in the months ahead. Again, the impact of "uncertainty" from the overall economic environment to consumer demand keeps business investment running at minimum levels from just normal equipment replacement cycles and investments to increase productivity to keep employment to a minimum.
Until there is an improvement in the uncertainty that surrounds the economy there is likely very little headway that will be made in the months to come. While further stimulative programs may boost asset markets in the near term it is unlikely that the engines of economic growth will kick in until debt levels are reduced, tax policies are clarified and the regulatory environment is cleared.
The NFIB sums it well: "Overall, it is clear that the 'economic growth stars' are not in alignment and that we can expect very sluggish growth for the balance of the year, ever grateful for population growth which will help insure that we don’t experience the dreaded recession. If consumers and business owners were presented with a plan to resolve our calamitous debt/spending cycle that they could believe in, they would spend more. Until then, no risky bets will be placed."