February Report: Small-Business Owner Confidence Barely Budges
The New Year Begins with Low Expectation for Future Growth
Small-business owner confidence continues to drag, according to the National Federation of Independent Business (NFIB) Small Business Optimism Index. The Index gained 0.9 points, rising to 88.9, failing to regain the losses caused by last month’s “fiscal cliff” scare. Expectations for improved business conditions increased by five points, but remain overwhelmingly low—negative 30 percent—the fourth lowest reading in survey history. Actual job creation and job creation plans improved nominally, but still not enough to keep up with population growth.
“The Optimism Index barely budged in January. The only good news is that it ‘budged’ up, not down. If small businesses were publicly traded companies, the stock market would be in shambles. While corporate profits are at record levels as a share of GDP, small businesses are still struggling to turn a profit,” said NFIB chief economist Bill Dunkelberg. “With the dismal news that our economy actually contracted in the fourth quarter of 2012, it isn’t any wonder that more small firms expect their real sales volumes to fall, few have plans to invest in new inventory, and hardly any owners are expanding or hiring. Owner pessimism is certainly not surprising in light of higher taxes, rising health insurance costs, increasing regulations and just plain uncertainty. The President will address the state of our nation tonight, but he apparently won’t have much that’s positive to relay to our small-business community—not while the pall of uncertainty over economic policy continues to depress investment spending and growth.” -- NFIB chief economist Bill Dunkelberg
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NFIB Research Foundation's Holly Wade
Explains This Month's Optimism Index
This survey was conducted in January 2013. A sample of 10,799 small-business owners/members was drawn with 2,033 usable responses were received for a response rate of 19%.
Highlights
- Sales: Sales trends remain overwhelmingly negative for small employers, with still more owners reporting declining sales than experiencing positive sales trends. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months improved 1 point in January, landing at a negative nine percent. For context, the five-year high of a net four percent was reached in April of 2012. The low for this cycle was a net negative 34 percent in July of 2009. Nineteen (19) percent of owners still cite weak sales as their top business problem. Seasonally unadjusted, 19 percent of all owners reported higher sales (last three months compared to prior three months, up 1 point) and 32 percent reported lower sales (up 2 points). As consumer spending remains weak, so do the expectation for real sales among small employers. The net percent of owners expecting higher real sales volumes improved 1 point to a negative one percent of all owners (seasonally adjusted), still 13 points below the 2012 cycle high of net 12 percent reached in February 2012. Not seasonally adjusted, one quarter of owners surveyed expect improvement over the next three months (up 5 points) and 32 percent expect declines (down 8 points).
- Job Creation: Job creation was positive in January, but ever-so-slight. Overall, 11 percent of surveyed owners (unchanged) reported adding over the past few months, and nine percent reduced employment (down 4 points), seasonally adjusted. But the vast majority—the remaining 80 percent of owners—made no net change in employment. Forty-three (43) percent of owners surveyed hired or tried to hire in the last three months and 34 percent (79 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Eighteen (18) percent of all owners reported job openings they could not fill in the current period; January is up 2 points from December, but still historically low.
- Inventories: The pace of inventory reduction continued in January, with a net negative seven percent of all owners reporting growth in inventories (seasonally adjusted), 3 points better than December, but still more owners reducing stocks than adding to them. Unadjusted, nine percent reported growth in inventory stocks (down 2 points) and 22 percent reported inventory reductions (up 1 point). For all firms, a net negative one percent (down 1 point) reported stocks too low, historically a good level of satisfaction with inventory stocks. Plans to add to inventories remained weak at a net negative seven percent of all firms (seasonally adjusted), 3 points worse than December.
- Capital Spending: The frequency of reported capital outlays over the past six months rose 3 points to 55 percent. Of those making expenditures, 39 percent of owners reported spending on new equipment (up 3 points), 21 percent acquired vehicles (up 3 points), and 12 percent improved or expanded facilities (down 1 point). Five percent acquired new buildings or land for expansion (down 1 point) and 11 percent spent money for new fixtures and furniture (unchanged). Overall, there was no sign that capital spending might be returning to levels more consistent with past recovery periods. Twenty-one percent of owners plan to make capital outlays in the next three to six months, rising 1 point from the month prior. Six percent characterized the current period as a good time to expand facilities (down 2 points), historically a very weak number. The net percent of owners expecting better business conditions in six months was a net negative 30 percent, 5 points better than December but still dangerously low—the fourth lowest reading in nearly 40 years.
SBET INDEX SUMMARY
Optimism Index
The NFIB Index of Small Business Optimism increased 0.9 points to 88.9, still one of the lowest readings in the survey’s 40 year history. Economic growth in the fourth quarter turned negative. Yes, 2 million jobs were added last year, but the population grew by 3 million so, mathematically, far fewer of those who were dislocated by the recession have found a job. It is no surprise that consumer sentiment remains depressed as well. Expectations for business conditions in six months improved 5 points to negative 30%, the fourth lowest reading in survey history. Owner pessimism is certainly not surprising in light of higher taxes, rising health insurance costs and increasing regulations. There was very little to be positive about. Only 11% of consumers thought government was doing a good job in the Reuters/University of Michigan survey, a very poor showing.
LABOR MARKETS
Forty-three (43) percent of the owners hired or tried to hire in the last three months and 34% (79% of those trying to hire or hiring) reported few or no qualified applicants for open positions. More owners are now reporting net hiring than are reporting reductions, a positive development if it holds up. Eighteen (18) percent of all owners reported job openings they could not fill in the current period, up 2 points from December but still historically low for an expansion. This measure is highly correlated with the unemployment rate, so the NFIB survey anticipated little change in the rate. Job creation plans regained some of the December loss, rising 2 points to a net 3% planning to increase total employment. It is clear that the fourth quarter in 2012 was weaker, and plans have not regained the levels reached in early 2012.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months improved 1 point to a negative 9 percent. The five year high of a net 4 percent was reached in April last year. Nineteen (19) percent still cite weak sales as their top business problem, historically high, but far better than the record 34 percent reading last reached in March 2010. The net percent of owners expecting higher real sales volumes rose 1 point to a negative 1 percent of all owners (seasonally adjusted). The pace of inventory reduction continued with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), 3 points better than December, but still more owners reducing stocks than adding to them. But, with rather dismal sales expectations, plans to add to inventories remained weak at a net negative 7 percent of all firms (seasonally adjusted), 3 points worse than December.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose 3 point to 55%, still in “maintenance mode” but at least an increase. The percent of owners planning capital outlays in the next 3 to 6 months rose 1 point to 21%. Six percent characterized the current period as a good time to expand facilities (down 2 points), historically a very weak number. The net percent of owners expecting better business conditions in 6 months was a net negative 30%, 5 points better than December but still disastrous, the fourth lowest reading in nearly 40 years. Overall, spending remained in “maintenance” mode, at levels only slightly better than during the Great Recession. And, with a very bearish outlook on the economy, plans to spend remained depressed.
INFLATION
Nineteen percent of the NFIB owners reported raising their average selling prices in the past three months (up 3 points), and 15% reported price reductions (down 2 points). Seasonally adjusted, the net percent of owners raising selling prices was 2%, up 2 points. Seasonally adjusted, a net 21% plan price hikes, up 5 points. The recession and the weak recovery have made sure that the lid stays on inflation. There is still far too much capacity and far too few customers to produce a rising price level.
EARNINGS AND WAGES
Reports of positive earnings trends improved 3 points in January after a 3 point improvement in December, rising to a net negative 26%, still a dismal reading. Three percent reported reduced worker compensation and 14% reported raising compensation, yielding a seasonally adjusted net 13% reporting higher worker compensation (unchanged). A net seasonally adjusted 7% plan to raise compensation in the coming months, up 2 points from December. Earnings are the major source of capital for small firms to finance growth and expansion (and repay debts incurred to invest in their firms). With rising tax rates for many owners, rising health care costs, and a flood of new regulations to comply with, generating the profits needed to grow businesses will be more challenging in 2013.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, unchanged from December. Thirty-one (31) percent reported all credit needs met and 3% reported that financing was their top business problem. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 2 points from December and historically low. A net 7% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), 2 points lower than December. The average rate paid on short maturity loans was 5.5%, stuck at much the same level for years.
COMMENTARY BY BILL DUNKELBERG
Bad news continued to dominate the information flow to business owners. GDP actually fell in the fourth quarter, and grew less than 2% for all of 2012. A sharp decline in defense spending subtracted about 1.3 percentage points from the growth rate, a warning as to what might happen if sequestration actually occurs with no deal to change its magnitude and timing. A sharp decline in inventory building also knocked a point or more off the GDP growth rate. But even if those events had not occurred, overall growth would have still been around 2%, not enough to produce the jobs needed to reduce unemployment meaningfully. Indeed, the unemployment rate went up. Now the focus is on what Congress will do to avoid the sequestration and deal with the debt limit. Odds are a deal will be reached, but uncertainty reigns, just what it will look like, how much more in tax revenue and how meaningful spending reductions will be is very unclear. As a consequence, uncertainty about the growth in the economy and economic policy continues to depress investment spending and hiring and keeps consumers depressed and spending less as well.
So, no surprise, the Optimism Index barely budged. The only good news is that it “budged “up, not down. Still, the outlook for business condition midyear is grim, Thirty-five percent expect conditions to be worse, 10 points better than December, but historically one of the worst readings in 40 years of survey history, rivaling the 1980 figures. Many economists argue that what is needed is new firms to start and create new jobs. Nice idea, but it would take a net 1.6 million new starts (with an average of 5 employees) to employ the 8 million who lost their jobs in the Great Recession. “New” firms didn’t lay off those workers, “existing” firms did, and they must rehire workers if the unemployment rate is to be significantly reduced. And, not many new firms will start in this environment. Until recently, far more firms were being eliminated than started because we not only built too many houses in the boom, we also started too many new firms to serve consumers that were spending 99% of every after-tax income dollar in late 2008. Population growth generates the need for more firms and job growth in the long haul, but our current problem is that existing firms still haven’t re-hired to their 2007 levels. A huge chunk of this is in construction.
Whatever Congress does, the private sector will continue to push the economy forward. As Thoreau once observed, the only way government can help business is to get out of the way. Congress can certainly slow the economy down, even help create crises, but in the longer run, the economy will grow, especially with population growth of 3 million annually (thus housing must recover). We just have to wait and see what the “management team” decides to do for USA, Inc. Hopefully, their decisions will improve our “bottom line.”