NFIB: More About The Economy Than The Election
Today the National Federation of Independent Business (NFIB) released their monthly survey. In short, economic confidence collapsed. From the NFIB Release:
Small Business Optimism Index dropped 5.6 points in November, bottoming out at 87.5. The two major events in November were the national elections and Hurricane Sandy, which devastated parts of the East Coast. To disentangle these, the results for the states impacted by Sandy were excluded from the computation for comparison. When separating the hurricane-impacted states from the remainder, the data makes clear that the election was the primary cause of the decline in owner optimism.
“Something bad happened in November—and based on the NFIB survey data, it wasn’t merely Hurricane Sandy. The storm had a significant impact on the economy, no doubt, but it is very clear that a stunning number of owners who expect worse business conditions in six months had far more to do with the decline in small-business confidence. Nearly half of owners are now certain that things will be worse next year than they are now. Washington does not have the needs of small business in mind. Between the looming ‘fiscal cliff,’ the promise of higher healthcare costs and the endless onslaught of new regulations, owners have found themselves in a state of pessimism. We are forced to ask: is this the new normal?” -- NFIB chief economist Bill Dunkelberg
Almost immediately following the release came published reports stating that the NFIB report was nothing more than sour post-election grapes.
"...opinions about economic optimism are politically driven. And it's known that small business owners were overwhelmingly Romney supporters. So when you're polling small businesses, you're just asking a sub-set of Republicans. And we already know Republicans are pissed, and so naturally small businesses got more upset. No real news."
While it is true that the large majority of business owners are supportive of the conservative ideals, as managing a business almost requires that mentality, the idea that this report is insignificant is very shortsighted. Regardless of your political bias small business create about 70% of all employment in the domestic economy. Furthermore, their concerns post the election are not that "Romney lost" but, as Bill Dunkleberg stated, the impact of rising taxes, increased healthcare costs and continued economic uncertainty. These concerns, whether you agree with them or not, are "real and significant" to small business owners and keeps them on the defensive. From the survey:
"The most significant factor impacting the decline in optimism is the expectation that future business conditions will be worse than current ones. The net percent of owners expecting better business conditions in six months fell 37 points to a net negative 35 percent. In October, the percent of owners who said they were uncertain as to whether business conditions would be better or worse in six months hit a record low of 23 percent. Many of those who were uncertain about the economy in October became decidedly negative in November; 49 percent of the owners now expect business conditions to be worse in six months, while 11 percent still express uncertainty about the future.
In the history of the monthly Index, only seven readings were lower, all but one in the last few months of 2008 and early 2009, the depths of the last recession. Prior to 1986 (when the survey was conducted on a quarterly basis), there were just two readings lower, 1975Q1 and 1980Q2."
"Poor sales" has remained one of the top 3 concerns of small business owners since the onset of the financial crisis along with taxes and government regulations. The chart below shows "poor sales" compared to "economic confidence."
The plunge in confidence in the most recent report was not so much a testament of disappointment that "Romney lost" but rather the dashing of hopes that a change in leadership might have changed the course of the economy for the better. The chart above clearly shows that while the economy has shown some recovery since the end of the last recession the outlook by businesses has remained at levels lower than previous recessions. This has kept hiring and capital expenditures relegated to just meeting demand rather than expansion.
For the economic outlook the decline in forward expectations and capital expenditure plans is concerning. While economic growth increased from 1.3% in Q2 to 2.7% in Q3 the bulk of that growth came from unwanted inventory accumulation, government spending and an improved trade deficit. Furthermore, the concern of "poor sales" is likely to increase in the December report as retail sales have weakened with consumer spending revised down substantially with no signs of improvement on the immediate horizon. For all of these reasons it is likely that the Q4 report on GDP is likely to be far weaker than economists currently project.
There are some certainties that have come with the recent Presidential election and Bill Dunkleberg sums them up best.
"Apparently the level of uncertainty was not resolved in a way that was supportive of many small-business owners. Out of 377 surveys since the first in 1973, the current reading of the Index of Small Business Optimism is the tenth lowest on record. The decline in the Index from already recession level readings in October was one of the largest on record. Something bad happened, and it wasn’t Sandy based on the NFIB survey data for November, it was the election. Owners in the rest of the country were as bummed out as those in Sandy states.
Some things are more certain, the healthcare law will not be repealed as advertised. The “war” on success is now public policy as the President insists on higher tax rates for the “rich,” those making $250,000 or more. He continues to obfuscate by claiming that only 3% of small-business owners will be impacted, as if even those are not a concern. But the disingenuousness of that statistic masks the fact that the denominator in his fraction is “30 million small businesses.” But, there are, according to Census, only 6 million employer firms, so an accurate assessment of the percentage of employer firms impacted is more like 15%. The President claims that there is not enough revenue in restricting deductions; that eliminating charitable deductions would, for example, put hospitals, universities etc. on the verge of collapse. This assumes that people only give for a tax deduction; this would be news to the Red Kettle Salvation Army collectors! They don’t hand out receipts, and even donors in the highest tax bracket still have to pony up over 60% of any gift out of their own pockets. Charity is not about tax breaks, it about doing good things. Meanwhile, new and proposed changes in regulations proliferate at record rates."
The uncertainty surrounding the economy that currently exists limits the ability for businesses to plan. While the country can continue to run without a budget, as long as there is "ink for the printing press," small businesses do not have that luxury. For businesses their outlook is driven by those silly little economic factors like supply, demand and profits. While it may currently seem to be a statement by businesses on the results of the election - it is more of an outlook on the future of the economy and how their personal livelihoods are going to be affected.
It is important to view this report from the perspective of the business owner. Business owners are some of the best allocators of capital and resources. They spend money to increase production, expand facilities and hire employees to meet increasing demand. They operate within the confines of the real economic environment, rather than theory, and the results of the recent election point to a tougher economic climate ahead. 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.