Each month I continue to update our analysis of the small business survey when it is published by the National Federation of Independent Business (NFIB). While this survey doesn’t get a tremendous amount of press, as a small business owner myself, I find its results more aligned with what I am seeing in the “Main Street” economy versus what the government reported data suggests.
For example, last month’s report entitled “Making Lemonade” showed relatively little improvement in the economic outlook by small businesses. Since that time the Institute of Supply Management’s and Federal Reserve’s surveys have showed sharp upticks while, at the same time, the Bureau of Economic Analysis revised GDP up from 1.7% to 2.5%. Therefore, it should be expected that such improvement in the government related reporting should translate into a much more robust report from small businesses. However, that was not the case as the NFIB reported:
“Small business optimism remained flat in August, dropping 0.1 points from July for a final reading of 94.0”
“While the total reading showed essentially no change over the month prior, a look at the individual indicators reveals incongruent details.”
One of those incongruences in particular was in job creation plans the jumped to a level not seen since before the last recession. However, that increase is not supported by the dramatic deterioration in real sales. The chart below shows the very abnormal divergence between actual sales versus sales expectations. The problem is that real sales tends to lead expectations which would mean that we may have seen the peak of expectations currently.
The favorable employment plans also contrasted sharply with the increasingly negative expectations of future business conditions. While there had been some recent improvement in recent months from historically low levels at the end of 2012 – outlooks remain at very recessionary levels.
The statement from the NFIB summed this up well stating:
“Overall, the Index of Optimism says the small business sector is going nowhere and that’s what it feels like. Consumer sentiment is falling so there is no wind in the sails of the consumption barge. It floats, but no speed…Owners reported lousy performance in the past few months with employment cuts, falling sales and profits, no ability to raise prices, and weak sales the top business problem for 1 in 5 employers. In particular, spending on services (70 percent of consumption) is very sluggish, up 0.5% year over year and declining at a 1.5% annual rate in July. This is where jobs are generated. Disposable income is up only 0.8% year over year, so no support for spending there. The savings rate is very low again therefore not much room to support more spending with less saving. Durable goods spending has posted strong growth, but this are doesn’t produce many new jobs.”
However, despite that there were some bright spots in the report. First of all, as shown in the chart below, there was a massive jump in job creation plans for the next few months. The spike is somewhat anomalus but not entirely unlike what was seen in 2003. The issue, however, is that this may be more representative of two things: 1) labor hoarding has most likely run its course as employers have run out the ability to increase worker productivity much further leading to a need for hiring, and; 2) this may likely represent the peak of employment for the current cycle as it did in 2003.
It will be interesting to see if actual employment actually follows the current spike in intentions.
Capital expenditure plans also increased on the back of rising employment plans and the need to expand inventory holdings. The sluggish demand from the beginning of the year has led to short term pent up demand and low levels of inventory which now need to be restocked. The issue will be sustainability going forward if actual demand, in terms of sales which has been very poor, does not markedly improve.
“While more owners expect the economy to sink further over the next six months than improve, there was a surge in expectations for gains in real sales volumes at their own companies. This is paradoxical at the macro level, although with differing regional economies, possible.”
While the world is currently glued to the events surrounding Syria; the reality is that such an event has very little to do with the real economy. The surges in expectations by business is very interesting given the actual demand that drives the real economy. Real employment remains weak and corporate earnings are struggling given the diminishing returns of cost cutting.
The recent increases in interest rates also have a very important “tightening” effect on the “Main Street” economy which will also likely suppress consumption in coming months somewhat. Also not likely factored in to current survey’s is the upcoming debt ceiling debate and the onset of the Affordable Care Act (ACA). The ACA is a de facto increase in taxes and there is a potential for further tax hikes coming from the budget debate.
One of the more interesting points from the NFIB was their view on the upcoming Federal Reserve “taper.”
“Federal Reserve ‘tapering’ [will not have] a noticeable impact on the real side. Financial markets (where trading, not investing, dominates) will see more volatility. If tapering occurs, it will fall on Treasury purchases, not MBS. The market is a bit short of Treasuries for doing business anyway, so any reduction in the $85 billion in purchases will fall on Treasury bonds.
The reality has been, and which is now being realized by the Federal Reserve, is that these ongoing interventions have done little to help the real economy but rather just inflated asset prices. Therefore, the “taper” has more of an effect on Wall Street rather than Main Street.
The current survey suggests that the economy is still stuck in “struggle mode” and an acceleration above 2% real economic growth is currently unlikely. The divergence between expectations and real demand will likely converge in the next couple of months so we will see businesses follow through with their optimisitic outlooks.
NFIB chief economist Bill Dunkelberg makes an excellent conclusion:
“But we saw some interesting things happening with the Index this month. The August reading provided us with a rather perplexing set of statistics; internally consistent on some dimensions, such as lower sales bringing lower profits, but contradictory in other ways, such as lower job openings but huge gains in hiring plans. We know that the upcoming implementation deadlines for the healthcare law are weighing on the minds of employers, and the current dim prospects for real tax reform must be, as well. The September survey will hopefully straighten things but with Syria on the horizon, the budget situation still up in the air, and Obamacare being rolled out, clarity over our economic direction is not likely to be the outcome.”