NFIB - Shows Flaws In Current Policy Mix
The National Federation of Independent Business released their monthly small business survey this morning which was primarily unchanged in May coming in at 94.4 which was down 0.1 from April. The NFIB stated that: "A reading of 94.4 is historically low and consistent with the sub-par performance of GDP and employment growth." While the index has improved from last October's lows it has yet to surpass the highs of last February which had the support of QE 2 driving the markets, economy and confidence.
The reading for May is still at recessionary levels from a historical perspective which is more than disappointing considering the trillions of dollars of monetary injections that have been pushed into the economy from the Federal Reserve (QE 1, 2 and OT) and the current Administration (Bailout, HAMP, HARP, Cash for "Clunkers", etc.). Furthermore, it is also consistent with the continued anemic growth of GDP and employment.
One thing that we can learn from the NFIB when discussing the impact of Federal stimulus and spending is that while the Administration may argue that the various bailouts and support kept the economy out of a depression, which is arguable, the dollars were effectively wasted as they never truly affected the business sector. This is the main reason that employment has remained constrained as businesses are still very much on the defensive due to the lack of aggregate end demand and continued concerns over the economic outlook.
This problem was clearly stated by the NFIB: "The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health care costs, regulatory compliance costs, all of which are very uncertain, meaning that owners cannot make reliable estimates of what will happen to these factors. Most of this uncertainty is coming out of Washington, D.C. Owners can’t attach probabilities to outcomes or even decide which outcomes to consider." This lack of clarity and the ability to plan is why 60% of the survey participants said that now is a bad time to expand their business. With "poor sales" still remaining a very pressing concern, although much improved from the peak of the recession, combined with concerns over political uncertainty and a weak economy, it is no surprise that business owners remain defensive.
Furthermore, and not surprising, the level of concern about "poor sales" has a direct impact on employment. The chart shows the high level of correlation between poor sales and employment. With the level of concern about sales still at levels normally associated with "peaks of recessions" it is not surprising the high levels of unemployment remain an issue.
The change in employment per firm, from the survey, showed no change. On a seasonally adjusted basis just 10% of business owners added employees, at an average rate of 2.6 workers per firm, during the previous few months. However, 15% reduced employment by an average of 2.1. The net decrease in employment has shown up in the number of individuals still filing for initial unemployment claims and the high number of individuals falling into the "No Longer In Labor Force" category in the recent employment situation reports. High levels of unemployment, stagnant wage growth and inflationary pressures from rising energy and food costs continue to impede consumer spending at levels to facilitate the demand necessary to reverse the outlook for future employment needs.
This also passes through to the level of capital expenditures that businesses will make on new property, plant and equipment. If businesses are worried about the outlook for the economy they will not commit to large capital expenditures which may not produce a profitable result. After all, despite Obama's complaints these businesses are not doing their "fair share" to assist the recovery, businesses are in business to make a "profit". While making a "profit" may go against the current administration's socialist manifesto of "equality for all" - it is the basic reality. The percentage of businesses planning capital expenditures over the next 3-6 months remains at levels lower than any other recessionary period on record. Furthermore, it appears that what capital expenditures are being made are for maintenance and replacement rather than expansion.
The reality for the current Administration is that bailing out Wall Street and the Banks has done very little for Main Street America. According to a recent Fed study on U.S. wealth individuals today are 38.8% poorer than they were in 2007. The collapse in inflated home prices led the decline in net worth which has destroyed the "wealth effect" for consumers putting them on the defensive. Moreover, the report shows that the median family income in 2001 was $48,900 but today has fallen to $45,800 while the mean fell from $83,300 to $78,500. That decline in wages occurred while inflationary pressures rose deteriorating the purchasing power of consumers.
Those rising pressures on the consumer to just maintain their current standard of living has led to sharp increases in dependency on government support as well as reduced personal saving rates. The declines in income, combined with massive wealth destruction from a housing collapse and two nasty bear markets, will continue to crimp the consumers ability to inflate end demand to spur business growth. With the Administration blinded by "ivory tower" economists and theory - the real economy, made up of small businesses and the average American, are stuggling for survival. Maybe its time to admit that the current policies are not working and begin to consider other alternatives.