NFIB - Good News Beneath The Surface
The National Federation of Independent Business issued their monthly small business survey for August showing an increase from 91.2 last month to 92.9 in August. From the NFIB: "As expected, there was no real change in owner optimism in August since nothing happened to make owners more confident about the future. Consumers were equally unimpressed according to the University of Michigan/Reuters survey. The survey shows only 12% of consumers think the government is doing a good job and 46% feel government is doing a bad job. And while the top ranked problem (out of 75) in the recently released NFIB Problems and Priorities survey was health insurance costs, the second and fourth ranked problems were “uncertainty about the economy” and “uncertainty about government policy.” This goes a long way toward explaining why spending seems to be in “maintenance mode.” With 50/50 odds in the polls, the president will be determined by the flip of a coin. The policy outcomes depending on who wins appear to be hugely different, and consequently, owners are not betting their hard earned money on the flip of a coin. They are waiting for more certainty about the direction of the economy and policy.
Since 1986 when NFIB started the monthly surveys, the Index has been below 93 for a total of 50 months. Forty-three (43) of them have occurred in the current “recovery” which began in June 2009. That says it all about this recovery. Index readings of a typical recovery are generally above 100, the average historical reading."
That summary goes a long way into explaining the huge divide between Wall Street and Main Street. As I stated yesterday on CNBC, while Wall Street benefits from continued stimulus and government bailouts - businesses do not. Businesses depend on demand from consumers to purchase goods and services. That demand, however, is being constrained by the ongoing weak economy.
While there has been some improvement since the peak of the "Great Recession" - poor sales still provide an overriding concern for U.S. businesses when it comes to making decisions to increase employment or expand operations. While the concern over "poor sales" remained stagnant last month the number of businesses saying this is a "good time to expand" fell from 5 to 4 and remains near the lowest levels since the end of the last recession.
Not surprisingly there is a very close relationship between "poor sales" and the unemployment rate.
However, it is in this area of employment where we also find some good news lurking below the surface. In the most recent monthly report expectations of future hiring doubled from 5 to 10 and is now at the highest level since August of 2008. As shown in the chart below this hiring sentiment has a very close correlation to the annual change in employment. What these latest months' numbers suggest, if they hold, is that employment will increase in the months ahead. If Bernanke is paying attention to this number - it is definitely a sign to hold off on QE3 for now.
There is one concern with the recent jump in hiring expectations. We have seen these pops before that give way to a sharp reversal in the next couple of months. With the declines in recent manufacturing surveys of New Orders, Backlogs and slowing in shipments, particularly exports, it does create concerns that a reversal could occur in forward expectations in the September report.
Furthermore, this tidbit from the NFIB report concerning employment is worth a consideration: "Always looking for something positive in these dreary numbers, the labor market readings were very solid, with the best hiring plans number in 53 months and a 3 point gain in the job openings indicator. Good for the future, but really no good news about recent months, job creation for existing firms was still basically nil. Job creation in the private sector will depend on large firm hiring, if any, and jobs at new firms that are being created by population growth."
When it comes to the economy one of the key components in the GDP calculation is business investment. The news here is also positive as capital spending rose 1 point in the recent report while plans for future capital expenditures rose 3 points. However, while this improvement is good, these plans really represent nothing more than continued maintenance and replacement expenditures as these are still recession type readings. Most of these capex plans have been to maximize productivity from the existing labor force keeping employment at minimum levels in order to maximize profitability. With the pick up in expectations for real sales - hopefully, this will translate into further gains for business investment and hiring which will translate into stronger organic economic growth.
As I stated in yesterday's interview - there is no direct correlation between Fed bailout programs and employment. There is also no indication that QE programs facilitate anything other than speculative risk taking by the major banks, who are the recipients of QE programs, rather than providing liquiidity into the economy. The NFIB does a better job than I of explaining this: "Some Fed officials still talk about the unwillingness of banks to lend, and for some troubled banks, that might be the case. But these are few in number compared to the number of independent banks available and bankers continue to complain about a dearth of qualified applicants, a position supported by the NFIB surveys. QE3 seems to be creeping toward existence, but opposition is stiff and logical – who hasn’t already responded to record low mortgage rates? What firms didn’t pull the trigger on a project but for a quarter point rate differential? Indeed, if banks are reluctant, it may be due to the Fed’s engineered low rates, too low for ordinary banks to risk locking in for long periods of time. Yes, there might be a third stock market pickup from QE3, but this really isn’t going to get consumers to spend more, it would just be a gift to TBTF banks and traders. And it’s likely to be a very small response. The Fed may be way off its unemployment target (not specified), but QE3 will not have an impact on employment. It will make the Fed’s “unwinding” job more difficult and exposes the Fed to the risk of discovering that “the Emperor wears no clothes.”