Small Business Sentiment: A "Ho Hum, Yawn" Uptick
The latest issue of the NFIB Small Business Economic Trends is out today (see report). The May update for April came in at 91.2, which, despite a 2.6 point gain, remains in the gloomy lows at the 12th percentile in this series, where a distinctly recessionary mood continues to prevail.
Here is the opening summary of the report:
After last month's disappointing drop in small business confidence, April's Index of Small Business Optimism rose 2.6 points to 92.1, just above the recovery average of 90.7. In April's report, 4 Index components rose, 2 fell and 4 were unchanged. Yet pessimism abounds within the sector, as still far more of those surveyed expect business conditions to be worse in six months than those who think they will be better.
"Small-business confidence saw an uptick this last month, but it was a ho hum, yawn, at-least-it-didn't-go-down reading. The sub-par recovery persists for the small business sector," said NFIB chief economist Bill Dunkelberg. "Economic performance is contradictoryŚcorporate profits are at record levels and the stock market hits new highs, yet GDP growth for the past six months has averaged about 1.5 percent and the unemployment rate is 7.5 percent. Nothing in the NFIB data suggests that the small business half of the economy is expanding other than by an amount driven by population growth and associated new business starts now in excess of terminations. The lack of leadership in Washington and the resulting uncertainty depresses consumers' and business owners' willingness to spend and invest, and make bets on the future." -- NFIB chief economist Bill Dunkelberg
The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession.
The average monthly change in this indicator is 1.29 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.
Inventories And Sales
The findings on small business sales and sales expectations continue to highlight a fundamental source of distress.
|The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the first quarter compared to the fourth quarter of 2012 rose 3 points to a negative 4 percent. The low for this cycle was a net negative 34 percent (July 2009) reporting quarter over quarter gains. Sixteen (16) 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 8 points to 4 percent of all owners (seasonally adjusted). The pace of inventory reduction continued, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted). For all firms, a net negative 1 percent (unchanged) reported stocks too low, historically a good level of satisfaction with inventory stocks. Plans to add to inventories gained 5 points but rose only to a net 0 percent of all firms (seasonally adjusted).|
Has the Fed's strategy of quantitative easing had a positive impact on Small Businesses?
|Six percent of the owners reported that all their credit needs were not met, down 1 point and only 2 points above the record low. Thirty-one (31) percent reported all credit needs met, and 50 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 23 percent citing taxes. Thirty-one (31) percent of all owners reported borrowing on a regular basis. A net 7 percent reported loans "harder to get" compared to their last attempt (asked of regular borrowers only), up 3 points. The average rate paid on short maturity loans was 5.6 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8 percent (more owners expect that it will be "harder" to arrange financing than easier), 2 points worse than in March.|
This month's "Commentary" section offers a interesting context for the April data:
The world is starting to look a bit strange in many respects. Stock markets
are at record high levels and corporate profits a record share of GDP
(nominal). Yet real GDP barely grew in 2012 Q4 and a sub-par 2.5 percent
in 2013 Q1. Just how we get record profits but hardly produce more output
and have prices hardly growing is a bit of a contradiction. The NFIB survey
suggests that the small-business sector is not growing. New business starts
appear to be slightly ahead of terminations, but both levels are historically
Small-business owners remain quite pessimistic about the future and this has depressed spending and hiring. Capital spending is low which will eventually impact worker productivity as will the conversion of full-time workers to part-time workers induced by the health care law. Managing two part-time workers to do the work of one full-time worker too expensive to hire will add to inefficiency. Although better than the past few months, the percent expecting business conditions to be worse in 6 months exceed the percent expecting improvement by 15 percentage points.
Business Optimism and Consumer Confidence
The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so I've plotted it on a separate axis to give a better comparison of the volatility from the common baseline of 100.
With the latest NFIB data, we continue to see that the mood of small businesses is highly correlated with Consumer Confidence.