Best reading since October of ‘06
WASHINGTON, D.C., January 13, 2015 — The NFIB Small Business Economic Trends survey for December reached its highest level since October of 2006, with positive gains in eight of 10 indices, a strong signal that American small businesses could be finally shaking off the effects of the Great Recession.
“The Index showed some strength in November but most of the gains were confined to just two categories,” said NFIB Chief Economist Bill Dunkelberg. “The December Index shows much broader strength led by a significant increase in sales expectations.”
Significantly more respondents last month also said that now is a good time to expand, a sentiment that until recently hasn’t been very common among small business owners. The Index showed gains as well among owners who hired new workers, made capital investments and increased inventory.
“This could be a breakout for small business,” said Dunkelberg. “There’s no question that small business owners are feeling better about the economy. If they continue to feel that way, 2015 could be a very good year.”
See the full NFIB Small Business Optimism Index Below
OVERVIEW: SMALL BUSINESS OPTIMISM INDEX BREAKS 100
The Small Business Optimism Index gained 2.3 points, at long last taking the Index back to its pre-recession average and the highest reading since October 2006. While last month’s gain was accounted for just 2 of the 10 Index components (expected business conditions and real sales), the gain in December was broad-based, with 8 components advancing, one unchanged and one declining by just 1 percentage point. The single component posting a decline was expected business conditions 6 months out. Last month, this component posted a 16 point gain, so the 1 percentage point decline simply confirmed the very strong gain in November.
Reports of actual capital spending jumped 3 percentage points and plans for capital spending rose 4 points to 29 percent of all owners, the best reading since December 2007, the peak of the last expansion. The four “hard components” of the Index (spending, hiring plans, and job openings) accounted for half of the gain in the Index, in contrast to no contribution to the gain in November.
Reported price hikes remained at very low levels while reported increases in worker compensation reached the highest level since the peak of the last expansion. Interest in borrowing remained at historically low levels and complaints about credit cost and availability returned to record low levels (1 percent). Owners reported paying an average 5.1 percent for short-term loans, down 50 basis points. Profit trends improved as the net percent of owners reporting improved sales trends gained new strength, improving 6 percentage points to a net 2 percent.
Overall, the Index level and the strength of the “hard” components put the small business sector in line with the stronger growth in GDP recorded in the 2nd half of 2014 and supports more optimistic growth estimates for 2015. Although only two months have passed since the election (the outcome of which was widely anticipated), it would appear that the election mattered to small business owners even though the new Congress has yet to take charge.
SMALL BUSINESS OPTIMISM INDEX AND TEN COMPONENTS
CHARTS ARE QUARTERLY, TEXT COMPARES NOVEMBER TO DECEMBER FINDINGS
OWNER OPTIMISM
The Small Business Optimism Index posted another strong gain in December, delivering on the promise of the November numbers. The November gain of 22 percentage points was accounted for by just two components: expected business conditions and expected gains in real sales. December was a different and more significant gain of 25 percentage points produced by 8 of the 10 components. The non-contributing components added a negative 1 percentage point and that component, expected business conditions, jumped 16 percentage points in November, so the decline of only 1 point in December confirmed that gain.
The November and December gains of a total of a net 47 percentage points in positive responses suggests that the election mattered to small business owners. The two month gain is twice the size of the gain from January to October last year and about equal to the entire gain in the Index in 2013. That’s a significant move.
The November gain of 22 points came entirely from expectations components (16 points from expected business conditions and 5 from expected real sales gains). In December, half the gain came from spending, hiring plans and increases in job openings; the “hard” measures most closely related to real economic activity. Combined with additional reinforcement to November’s expectations component gains, the December improvement is substantial and significant.
LABOR MARKETS
The percent of owners reporting job creation rose 7 percentage points from November to a net 9 percent of owners. Overall, the average increase in workers per firm was 0.2 workers per firm, up from 0.05 in November and historically large. Eighteen percent report increasing employment an average of 2.9 workers while 9 percent reduced their workforce by an average of 3.0 workers (seasonally adjusted). Fifty-four percent reported hiring or trying to hire, but 43 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, down 1 point.
Twenty-five percent of all owners reported job openings they could not fill in the current period, up 1 point from November and a very solid reading. This anticipates a further reduction in the unemployment rate even if job creation is not especially strong.
Job creation plans improved 4 points to a seasonally adjusted net 15 percent, one of the stronger readings in NFIB survey history. This is a number consistent with the stronger GDP growth reported in the second half of the year and anticipates a ramp in private sector hiring.
GDP growth for Q3 was surprisingly revised up to 5 percent, a stunningly strong reading. Such a major shift in economic activity in just 90 days should have produced a sense of “economic whiplash” somewhere in the economy. The November jobs number might have qualified if it were not “contradicted” by a 4,000 job increase in the Household survey. But shifting gears in such a large economy can produce confusing results. That said, it would appear that the job market is set for improvement in 2015, at least in the small busienss sector which has been a laggard in the recovery.
CAPITAL SPENDING
Sixty percent reported outlays, up 3 points from November and the strongest reading since December 2007, the peak of the last expansion. Of those making expenditures, 42 percent reported spending on new equipment (up 3 points), 23 percent acquired vehicles (up 1 point), and 16 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (up 2 points) and 12 percent spent money for new fixtures and furniture (up 2 points).
The percent of owners planning capital outlays in the next 3 to 6 months rose 4 points to 29, the best reading for this expansion but still a bit weak historically . Of the 50 percent of owners who said it was a bad time to expand, 24 percent (up 5 points) still blamed the political environment. The net percent of owners expecting better business conditions in 6 months fell 1 point, but following a 16 percentage point gain in November, confirming that gain. A net 20 percent of all owners expect improved real sales volumes, up 6 points on top of November’s 5 point gain. These readings are very supportive of stronger capital spending in 2015.
SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months gained 6 points, rising to a net 2 percent. Eleven percent cited weak sales as their top business problem, one of the lowest readings since December 2007. Consumers really did start to show up, the best thing that can happen to a small business owner. Stronger sales can help cover the rising costs of a burdensome government.
Expected real sales volumes posted a 6 point gain, rising to a net 20 percent of owners expecting gains, this on top of November’s 5 point gain. Sales prospects are looking up.
INVENTORIES:
The pace of inventory reduction shifted to a neutral position, with a net 0 percent of all owners reporting growth in inventories (seasonally adjusted).
The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 3 percent. The net percent of owners planning to add to inventory stocks rose 3 points to a net 5 percent, consistent with the improved outlook for sales growth and the positive trend in sales gains. With current stocks viewed as excessive, owners appear collectively to feel that stocks are not sufficient to handle the expected (hoped for) surge in real sales volumes. Although satisfaction with current stocks was not strong, if the expected improvements in sales materialize, stocks will be quickly reduced and inventories will need to be built.
INFLATION:
Fifteen percent of the NFIB owners reported reducing their average selling prices in the past 3 months (unchanged), and 18 percent reported price increases (up 1 point). Seasonally adjusted, the net percent of owners raising selling prices was a net 4 percent, unchanged. There are no inflation pressures coming from Main Street.
Twenty-nine percent plan on raising average prices in the next few months (up 6 points), perhaps in anticipation of strong sales which will support price hikes. Four percent plan reductions (up 1 point), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 22 percent plan price hikes (up 3 points). Should these plans be realized, small businesses will become an engine of inflation.
EARNINGS AND WAGES:
Earnings trends improved 2 percentage points, reaching a net negative 15 percent (net percent reporting quarter to quarter earnings trending higher or lower). Labor costs continue to put pressure on the bottom line but energy prices are down a lot. That helps, but it is clear that firms are not yet able to pass their cost increases, primarily compensation, on to customers through higher prices. Perhaps the expected sales growth will be supportive of a growth in profits.
Three percent reported reduced worker compensation and 24 percent reported raising compensation, yielding a seasonally adjusted net 25 percent reporting higher compensation, up 4 points. A seasonally adjusted net 17 percent plan to raise compensation in the coming months (up 2 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations.
CREDIT MARKETS:
Four percent of the owners reported that all their credit needs were not met, holding at the historic low. Thirty-two percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 1 percent reported that financing was their top business problem (a record low) compared to 27 percent citing taxes, 22 percent citing regulations and red tape and 11 percent citing weak sales. Eleven percent complained about the availability of qualified labor.
Thirty-one percent of all owners reported borrowing on a regular basis, down 2 points. The average rate paid on short maturity loans fell 50 basis points to 5.1 percent. Loan demand remained historically weak. The increased optimism and plans to hire and spend have not triggered an increase in owners’ willingness to borrow and make a bet on the future.
The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 5 percent; 1 point better than November. Interest rates are low, prospects for putting borrowed money profitably to work seem to be improving but loan demand remains weak among small business owners. It’s cash flow that matters more than interest rates. The Federal Reserve did all it could to improve the markets’ view of existing cash flows (creating record high financial asset prices) but did little to contribute to better cash flows for most of America’s firms.
OVERVIEW:
The BEA reported a blow-out economy in Q3 and Q4 appears to have been OK. But “low rates for too long” never produced the spending surge the Federal Reserve expected. As pointed out years ago in this report, the economy would heal itself in spite of the impediments and distortions government policy put in place, allowing the Federal Reserve to declare “victory” even if its policies were counterproductive as many observers and even some Federal Reserve officials believed. The cost of the QEs is far from clear and remain to be determined. Certainly QE1 was the right move, but only financial markets were the primary beneficiaries of subsequent actions, not the real economy. Fiscal and regulatory policy have provided no help, forcing firms to spend more of their scarce resources complying with record amounts of regulation and leaving the budget and tax policy floating without direction. The budget deficit has declined by a trillion dollars mostly without the benefit of major spending cuts or priority realignments.
So, it took 4½ years from the start of the recovery for the Index of Small Business Optimism to reach its pre-recession average, slogging along, and never once posting an above average reading. Assuming that non-member firms are similar to NFIB members as they are certainly subject to the same economic winds, half of the economy was not participating in the “recovery”, a bifurcated economy. Large firms profited, sending profits and the stock market to record levels, but that success was not shared on Main Street.
The recovery of Main Street which consists of about 5.5 million firms with fewer than 20 employees, can provide a good base for stronger economic growth. But any election euphoria that persists will soon be snuffed out if Congress cannot lay out a positive plan and make some progress on the top problems facing small business owners including: health insurance costs, uncertainty about economic policy, energy costs, the cost of regulations and red tape and the tax code which is too confiscatory, too complex, and changed too often. Prospects for progress are not that good with President Obama still holding his veto pen.
