NFIB - Pre-Election Hopes Of Romney Win
The NFIB released its small business survey for October which showed a small uptick in optimism among small businesses from 92.8 in September to 93.1 in October. However, it is important to note that this survey was completed prior to the November election and had the second highest participation rate of the year at 2029 respondents. The chart below shows the survey back to 1974 with major events overlaid.
It is highly likely that the uptick in optimism was primarily "hope" about a change of control in Washington as the underlying details in the survey have certainly not improved. Moreover, going into the election, expectations of a Romney win by the conservative right was high and was reflected by a push higher in the "optimism" component of the survey. More on this in a moment.
Employment remains the key near term concern to any economic improvement going forward. This months report once again displays the disparity between the Government and Main Street. As we stated in our previous NFIB report: "The detachment between the real economy, and that reported by the government, continues to exasperate the best laid plans of the Department of Central Planning (aka the Fed). As reported the NFIB small business survey has remained mired at recessionary levels since the statistical end of the last recession in 2009. The ongoing problem remains 'poor sales' which is the driver for all other business actions from increased capital expenditures to future employment."
That statement was once again reflected by the NFIB:
"The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was negative 15 percent, 2 points worse than in September, confirming the weak growth in non-durable consumer spending in the third quarter. Twenty-two (22) percent still cite weak sales as their top business problem, historically high, but down from the record 34 percent reading last reached in March 2010. The net percent of owners expecting higher real sales rose 2 points to 3 percent of all owners (seasonally adjusted). The reading is down 9 points from the year high of net 12 percent reached in February. The pace of inventory reduction continued, with a net negative 8 percent of all owners reporting growth in inventories (seasonally adjusted), unchanged from September.
For all firms, a net 0 percent (up 1 point) reported stocks too low, still a very positive report as this indicates minimal excess inventory in the hands of owners. Plans to add to inventories remained weak at a net negative 1 percent of all firms (seasonally adjusted), more plan to reduce stocks than plan to increase them."
There is nothing in the inventory and sales components that would lead one to believe that the current employment situation will markedly improve. The level of sales are the primary driver behind increasing employment, outside of maintaining existing production levels, and there has historically been a very high level of correlation between the expectations of sales and the unemployment rate.
We discussed in extensive detail in the last report about the divergence between the BLS employment reports and the small business survey. This month confirms the same with the uptick in the concern over "poor sales" suggesting that we will likely see uptick in the unemployment rate in the months ahead. The NFIB stated the same concerns as well:
"Five million workers are still "long term unemployed," 40 percent of the total pool of unemployed. The average duration of unemployment is about 40 weeks (median is 20), historically very high. The labor force participation rate is under 64 percent, below the 66 percent pre-recession level. This explains a large share of the decline in the unemployment rate; people who give up looking for a job and leave the labor force are not "unemployed." The 893,000 new jobs in the Household Survey (largely part-time) were inconsistent with private GDP growth of 1.3 percent. Historically, such a large number occurred during strong growth, as in June 1993 when GDP grew at an 8 percent annual rate."
While the holiday shopping season is upon us it is expected that almost all job gains in the next couple of months will primarily be in the lower wage paying, temporary, seasonal hires. Furthermore, as opposed to last year where we experienced the most unseasonably warm winter in 65 years which allowed construction and manufacturing to continue unabated, this year is already setting up to provide some payback.
One of the biggest issues that have been weighing on small businesses has been the uncertainty surrounding the economy, the regulatory environment and taxes going forward. In fact, according to the survey, the three biggest problems for small business owners remains (in order of importance) poor sales, taxes and government regulations and red tape. As stated above, small business owners tend to be more conservative in their views and optimism going into the election was for a change in the White House was high.
"Uncertainty about the election has been a major impediment to spending because the Presidential candidates offered very disparate policies for the economy."
The hope being that post the election there would be a clearer path about the direction of the economy, tax policy, and the regulatory environment (including a potential repeal of ObamaCare) which would increase visibility for long term planning and hiring.
As the NFIB stated: "We invested $2 billion and lots of time in 'change' but the day after the election looked pretty much like the day before: same President, same Senate and House, more or less. Certainly the major players on the stage are the same, the question is has the script changed? If the Republicans were looking for a new cast and an opportunity re-write the past, that hope is gone. If the President was looking for a re-take of the House, that cast will be the same as well. But, the play must go on and it will. Only a re-write of the script by both casts will produce progress. But writers haven't talked for months..."
With this diagnosis - I fully expect that the NFIB survey will take a turn for the worse in the coming months. Companies such as Papa Johns and Darden Restaurants have already started shifting more of their employment to part-time help to lower the impact of ObamaCare. Other companies are already curtailing plans for capital expenditures while plans for expansion remain near historic lows.
The NFIB summed it up best:
"For small business owners, all the uncertainties remain although the odds of resolving them in one direction or another will have changed for many. But overall, it is now unlikely that anything will happen in November to make them more optimistic about the future, as has been the case for many months, even years now. Let's see what the New Year and the new Congress brings, as it is likely that current Congress will simply 'kick the can' at least until January. One thing for sure, the economic pressure to do something will be large indeed. The November survey will reveal a combination of the effects of the election and hurricane Sandy."
It is doubtful that we will see much improvement in the economy between now and the end of the year. In fact, it is much more likely that given any impasse, debate or debacle on the issues that currently loom large into the end of the year that the survey will turn decidedly negative. This is particularly the case given the already weak earnings environment, weakness from international trading partners and geopolitical concerns.
While the NFIB report doesn't get a lot of attention from the media, or mainstream analysts, the survey of small businesses is important to watch due to the high correlations between it and other economic indicators. With small businesses comprising a large part of the economic landscape from employment, production and service, their outlook about the future direction and strength of the economy tells us much about what we expect in the months ahead.
The current message isn't one that points to a strongly recovering economy or employment. At best it is tepid - at the worst it is recessionary. The coming battle between the Republican House and the Democratic Senate on the issues of the Debt Ceiling, the Fiscal Cliff and the expiration of Transaction Account Guarantee (TAG) program at the end of this year has the stage set for a lot of market volatility. The best investment advice currently is to simply do what small businesses are doing - hold cash and wait for the outcome. A wrong guess, in either direction, could be costly to the bottom line.