NFIB: Optimism Improves But Don't Get Too Excited
The latest release of the National Federation of Independent Business small business survey showed an improvement in the latest reading to 94.4 up from 92.1 last month. Overall, the readings were positive and this is the second strongest overall reading of the recovery since 2009.
The survey showed that 8 of the 10 internal components posted monthly gains which were led by increases in economic expectations and a gain for sales expectations. The one negative for the month, unfortunately, was hiring plans. As a reminder; the index is still well below its long-term average of 100 and just barely above the post-recession recovery average of 90.7.
However, the opening statement of the survey is the most important for putting the latest data into context:
"For the second consecutive month, small-business owner confidence edged up, according to NFIB's Index of Small Business Optimism, which increased by 2.3 points to a final reading of 94.4 in May.
While May's reading is the second highest since the recession started December 2007, the Index does not signal strong economic growth for the sector. Eight of 10 Index components gained momentum, showing some moderation in pessimism about the economy and future sales, but planned job creation fell 1 point and reported job creation stalled after five months of gains.
'Small business confidence rising is always a good thing, but it's tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis, and while the stock market sets records, GDP posts mediocre growth. The unemployment rate remains in the mid-7s and it is departures from the labor force —- not job creation — that is contributing to its decline when it does fall. It's nice to see confidence not shrinking, but there isn't much to hang your hat on in this report. We are back to where we were in May 2012. Two good months don't make a trend, but we can't have a trend without them, so it's a start.' – NFIB chief economist Bill Dunkelberg"
If you take a look at the summary table above can see the real state of small businesses. The big drivers from small business on the overall economy are employment, capital outlays and business expansion. Currently, only a net 5% plan to increase employment, only 23% plan to make capital outlays and just 8% think that this is a good time to expand their business. While the headline of optimism is certainly encouraging - optimism and actions are two very different things.
As we have discussed previously in regards to "labor hoarding" there is definitely a very tight labor market currently. According to the survey; 47% of business owners hired, or tried to hire, in the last three months while 38% reported few, or no, qualified applicants for open positions. This is why we continue to see a continued fade in employment reductions which is causing "initial jobless claims" to fall (inverted in chart below) but hiring remains weak particularly in the economically important full-time category.
The looming approach of the Affordable Care Act (ACA), which is significantly increasing the cost of health care on businesses, is a huge incentive to increase productivity and the use of temporary and part-time workers. Employment plans fell by 1 point to a net of 5% in the most recent report which is a very weak reading.
It is hard to plan on increasing employment when concerns over revenue are weighing on your business. One of the top three concerns of small businesses is "poor sales" which directly affects hiring, expansion and capital expenditure plans. The chart below shows three things in this regard: 1) the level of actual sales over the past quarter; 2) firms expectations of sales over the next quarter; and 3) the average of actual and expected sales along with the historic median level.
While much improved from the recessionary trough, the level of sales, both actual and expected, still remain well below levels normally associated with previous recessions.
While "poor sales" impacts the top line of corporate income statements; it has been cost cutting, reduced employment and increases in productivity that have been driving corporate profitability. Capital Expenditures are also economically important as private investment is one of the components of the Gross Domestic Product (GDP) calculation. The chart below shows the increases in "Cap Ex" relative to the fairly stagnant plans to increase employment. I have also noted the very low levels of expectations regarding economic improvement.
While there has certainly been growth on the employment front; it has been the gains in productivity expenditures that have kept hiring and wages suppressed. With the large number of firms with very negative forward expectations of economy strength the hiring and capital expenditure components are not likely to improve until economic confidence increases substantially.
Don't Get Too Excited
While the most recent NFIB survey was certainly a welcome improvement the problem is that mainstream analysts, and economists, tend to take the number out of context. When viewing the data within the longer term trend we do see improvement on many levels but remain mired at levels normally consistent with historic recessions on all levels. This was summed up well by the NFIB:
"The small business half of GDP is clearly not participating much beyond growth generated by population gains. More businesses are being formed than lost, so there is some boost to job creation there, but too many existing firms have not yet started to replace the workers shed during the recession.
The Optimism Index is back to the May 2012 level which are identical to the November 2007 level (the Index fell all through 2007, signaling the oncoming recession). Since then, the Index has been higher in only three months, and by less than 2 points. The low for that period was 81.0 reached in March, 2009. So the Index is 13 points higher now, good news, but 6 points below the pre-2008 average and 13 points below the peak for the expansion, bad news. Until this sector gets in gear, it will be hard to generate meaningful economic growth. GDP growth was 8 percent in 1983, the first year of that recovery period."
"There are many headwinds for growth, the most important being consumer spending. Nothing encourages hiring and inventory and capital investment more than an growth in customers and spending. Consumer sentiment is up some, but not really supported by income growth or new jobs. The savings rate is under 3 percent, so spending is financed by reduced saving (which pays nothing anyway – people who bought 30 year Treasury bonds in 1983 are just now losing those great coupons). The flow of new regulations is very strong (the President promised to use regulatory power to accomplish his goals even if Congress did not cooperate), each agency with its own set of 'victims'.
On top of that, the ACA is about to grip the entire business community in a morass of new taxes, forms to fill out, fines and higher labor costs. Our global customers are experiencing slow growth for the most part and buying less. Monetary policy has become incomprehensible and Fiscal policy is in disarray. Uncertainty is a major impediment to economic progress. With 2014 elections almost upon us, we’ll just have to wait and see."
The chart above shows the top 3 concerns as reported by small business with the red line being average of the three. With the "concern index" still near its highest levels on record it certainly reflects the sentiments from the NFIB above.
As I concluded last time I discussed the NFIB Survey:
"[Those] issues are unlikely going to spur businesses to expand employment, make capital expenditures or increase production other than to maintain current demand levels. Furthermore, the upcoming budget debate is likely to fuel further concerns should there be little, or no, progress made in changing the outlook for the fiscal health of the country.
The bottom line is that the environment in which small businesses operate, which has been confirmed by many of the recent data points, does not seem to be improving as much as would have been hoped this far into an economic 'recovery.'"