It couldn't have come at a worse time.
On the cusp of the holiday shopping season, small business optimism dropped from 93.9 to 91.6, according to the National Federation for Independent Business (NFIB). The decline comes amid a sharp decline in hiring plans and expectations for future small business conditions.
Of the ten components that make up the NFIB Index of Business Optimism, seven turned negative -- falling a total of 27 percentage points. The stalemate in early October over funding the government as well as the failed “launch” of the Obamacare website left 68% of owners feeling that the current period is a bad time to expand; 37% of those owners identified the political climate in Washington as the culprit -- a record high level.
“Washington paralysis is never good news for the economy, so it was no surprise that while politicians were arguing over whether or not the government should remain fully operational, small-business optimism measures deteriorated,” said NFIB chief economist Bill Dunkelberg. “Small employers are not fooled by headlines announcing record high stock market indices; everyday they live the economic realities of over-regulation, increased taxes, weak sales and a government without any direction or plan for the future.”
The NFIB optimism index lost 2.3 points to 91.6, with two components -- the outlook for business conditions and the outlook for real sales gains -- accounting for 52% of the decline. A weaker outlook for business produced dissatisfaction with inventory stocks, and fewer plans to create new jobs.
The average value of the index since the recovery started is 91 -- 8 points below the 35 year average through 2007 and well below readings typically experienced in a recovery, so the current reading is hardly something to cheer about. It is very hard to identify any current developments that would make owners more optimistic. The new budget deadline of January 15, 2014 is approaching quickly and Congress continues to wrangle over the healthcare law and little else.
Twelve percent of the owners (up 1 point) reported adding an average of 3.5 workers per firm over the past few months. Offsetting that, 9% reduced employment (down 2 points) an average of 2.8 workers (seasonally adjusted), producing the seasonally adjusted gain of 0.11 workers per firm overall. The remaining 79% of owners made no net change in employment. Fifty-one percent of the owners hired or tried to hire in the last three months and 40 reported few or no qualified applicants for open positions.
Reports of workforce reductions have reached normal or sub-normal levels, explaining the favorable levels of initial claims for unemployment. Nine percent reported reducing employment, the lowest reading since 2006. But owners report sub-par levels of hiring, so job growth remains anemic even with low levels of initial claims. Twenty-one percent of all owners reported job openings they could not fill in the current period (up 1 point), a positive signal for the unemployment rate. But, job creation plans lost 4 points from September, landing at a net 5%.
Inventories & sales
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared with the prior three months deteriorated 2 points to a negative 8%. Seventeen percent still cite weak sales as their top business problem. The net percent of owners expecting higher real sales volumes fell 6 points to 2% of all owners (seasonally adjusted). Not much help for hiring or inventory investment in those numbers.
The pace of inventory reduction continued, with a net negative 6% of all owners reporting growth in inventories (seasonally adjusted) -- 1 point better than September. The net percent of owners planning to add to inventory stocks was a net negative 1%. The negative outlook for the economy and real sales prospects adversely affected inventory satisfaction. The net percent of owners viewing current stocks as too low fell to a net negative 5%, the worst reading since 2011.
The frequency of reported capital outlays over the past six months rose 2 points to 57%, the best showing since January, 2008 -- improved, but still relatively weak. A net 2% of all owners expect improved real sales volumes, down 6 points. Seventeen percent reported “poor sales” as their top business problem, unchanged from September. Reported sales trends deteriorated 2 points to a net negative 8%. Overall, the environment for capital spending deteriorated as what little confidence owners had in the future eroded further. The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 23%. Six percent characterized the current period as a good time to expand facilities (down 2 points).
Seasonally adjusted, the net percent of owners raising selling prices was 5%, up 4 points. Twenty percent plan on raising average prices in the next few months (unchanged), and 3% plan reductions (up 1 point). Seasonally adjusted, a net 18% plan price hikes, down 1 point. Not much of this is likely to “stick” if owners are correctly forecasting the future of the economy over the next six months.
Profits & wages
Earnings trends did not improve in October, holding at a negative 23%. Two percent reported reduced worker compensation and 18% reported raising compensation, yielding seasonally adjusted net 16% reporting higher worker compensation (down 1 point). A net seasonally adjusted 10% plan to raise compensation in the coming months -- down 3 points. Overall, the compensation picture remained at the better end of experience in this recovery, but historically weak for periods of economic growth and recovery. This is consistent with the macro reports about weak growth in income and compensation. With a net 16% raising compensation but a net 5% raising selling prices, profits will continue to be under pressure.
Six percent of the owners reported that all their credit needs were not met, unchanged from September. Twenty-eight percent reported all credit needs met, and 53% explicitly said they did not want a loan. Only 2% reported that financing was their top business problem. Twenty-eight percent of all owners reported borrowing on a regular basis, down 2 points and a record low. A net 6% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 1 point from September. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8 percent, 1 point worse than September. A surprising result in an economy with the most aggressive monetary policy in history.