The latest NFIB survey of small businesses for June was a mixed bag of results. There were spots of improvments in employment plans, expectations of economic improvement and price changes. However, these were deeply offset by deterioration in just about everything else from plans to increase inventories, which is a drag on GDP, higher real sales, credit conditions, expansion, compensation and earnings.
"Small-business optimism remained in tepid territory in June, as NFIB's monthly economic Index dropped just under a point (0.9) and landed at 93.5, effectively ending any hope of a revival in confidence among job creators. Six of the ten Index components fell, two rose and two were unchanged. While job creation plans increased slightly in June, expectations for improved business conditions remained negative. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months."
The overall report is a reflection of the ongoing weakness in the economy and the continuation of sub-par growth rates that have stifled business outlooks. The recent repeal of the implementation of the (Un)Affordable Care Act for businesses does NOT increase their comfort zone to start hiring and expanding. The repeal extends the current inability to plan for future increases in costs for an additional twelve months. As seen in the recent employment report; full-time employment, which is where the costs of ACA will have the greatest impact, actually declined while temporary hires continue to expand. This is not a complicated issue to understand. If businesses cannot quantify the increases in benefit costs, regulatory expenses and compliance outlays then they cannot project future profitability which keeps them on the defensive.
The NFIB summed this thought up well.
"In the meantime, uncertainty reigns supreme, who knows what labor will cost or when or what firm size will have to comply with which rules – Health and Human Services is still writing them. The President's delay for compliance among those with 50 employees or more is a political move, fearing the bad press that might occur prior to elections from the chaos produced by mandatory compliance. It is clear that the government is not prepared to implement this. Really, a group of people, most with little or no private sector experience, decided to restructure 15% of the Gross Domestic Product (GDP). This is what we expected, a rolling disaster – exemptions, special deals, delays, confusion, contradictory regulations. It's a bad situation in Washington, scandals, no budget deals, no dealing with the big problems, our own government agencies taking advantage of us, Congressional law being suspended by the President, a flood of executive orders, the threat of higher energy costs (the attack on coal). Not a good time to bet on the future by hiring lots of workers with uncertain cost. The NFIB June survey confirms that."
This sentiment is clearly reflected in the capital expenditure and hiring plans for small businesses. The chart below shows the percent of respondents expecting the economy to improve, planning to increase employment and making capital expenditures over the next three months.
While the most recent survey showed an increase in employment expectations the problem is that it does not distinguish between full-time and part-time hires. However, it is important to understand that hiring plans remain at levels that have historically been consistent with recessionary troughs rather than expansions.
The recent bounce in expectations for economic improvement is also encouraging, but like employment, remains at levels normally consistent with recessions and is bouncing off of extremes that was seen during the "fiscal cliff" scare. With the "debt ceiling" debate rapidly approaching we are likely going to see this sentiment deteriorate in the months ahead. This all goes to explain why expectations of capital expenditures remains not only weak but also declined in the most recent survey.
Show Me The Money
Of course, what really drives increases in employment, capital expenditures and, ultimately, the economy is revenue. Unfortunately, the outlook for sales has remained a disappointment and was reiterated in the latest survey. The percent of firms expecting higher sales in the next three months fell from 8 to 5 in June while those reporting higher nominal sales this quarter fell from -4 to -8. Finally, the percent of firms reporting "poor sales" as a primary concern rose from 16 to 18 which is the increase since November of 2012. The chart below shows the average of those expecting and reporting higher sales.
The concern over sales was summed up well by the NFIB:
"The revision of first quarter GDP growth to an anemic 1.8% at an annual rate confirms that the economy is growing at a very slow pace, not enough to produce many new jobs. The largest contributor to the negative revision was consumer spending, in particular to spending on services, which account for about 70% of consumer spending"
Bill Dunkleberg, Chief Economist for the NFIB, stated as well:
"Economic growth was revised down for the first quarter of the year and the outlook for the second quarter is not looking good. Nothing cheers up a small-business owner more than a customer, and they remain scarce and cautious while consumer spending remains weak and more owners are reporting negative sales trends than positive ones. It certainly doesn't help that the endless stream of delays and capitulations of certain provisions of the healthcare law adds to the uncertainty felt by owners. Until growth returns to the small-business half of the economy, it will be hard to generate meaningful economic growth and job creation."
Of course, regardless of where you look in the survey, virtually all of the key measures are consistent with historic recessionary troughs rather than expansions. This is why everything from wages, to employment to the economy remain mired at sub-par levels of growth despite much rhetoric to the contrary.
3 Big Problems
The three largest problems that are constraining business currently haven't changed - government regulations, taxes and poor sales. As stated above the uncertainty over future regulatory costs and compliance, higher taxes and poor sales all directly affect profitability. With increasing costs and weak demand the drive to protect profitability is crucial to businesses. The chart below shows the 3-month average of the top three concerns by businesses which remains near its highest level on record.
The problem of course with these excessive levels of concerns by businesses, as stated previously, is that it inhibits their hiring, capex and compenstation plans. In order for an economy to grow, especially one that is based 70% on consumption, individuals need to produce first to get a paycheck from which they can consume. The problem is that the weakness in end demand is keeping wages supressed and hiring at a level that is barely consistent with population growth. As stated in the NFIB report:
"Reports of positive earnings trends deteriorated 1 point in June to a negative 23%, a poor reading. Four percent reported reduced worker compensation and 19% reported raising compensation, yielding a seasonally adjusted net 14% reporting higher worker compensation (down 2 points). A net seasonally adjusted 6% plan to raise compensation in the coming months, down 3 points. Overall, the compensation picture weakened some, but remained at the higher end of experience in this recovery even if historically weak."
Not Supportive Of Growth Expectations
With mainstream economists predicting a return to stronger economic growth in the last half of 2013 and into 2014, which will allow the Fed to end its current "bond buying" scheme, the NFIB survey certainly does not support such optimism. Since small businesses currently create the majority of employment in the economy it is hard to see where the cycle of higher employment, wages and demand will come from.
With 40% of corporate profits derived from exports - the slowdown in China, recession in the Euro-zone and declines of activity in emerging markets certainly does not bolster the profitability outlook for businesses. While housing has certainly been a brightspot in the economy as of late it is currently a boom driven almost entirely on speculation, cash purchases and reduced supply. Historically, such booms have led to eventual busts when the speculators rush to the market to try and dump their holdings at a profit. The NFIB also addressed the housing issue in their recent report stating:
"The economy remains 'bifurcated', with the big firms producing most of the GDP growth with little help from small business. That balance is shifting, but unfortunately because larger firms are losing ground, not because small business is growing faster. Housing and energy are helping, and that does involve a lot of small businesses but the rout in housing was so severe that there are now supply constraints developing in new home construction due to lost capacity that cannot be easily reconstituted. Home prices are now increasing at double digit rates. Consumer net worth is allegedly doing well due to stock prices and house prices rising. But the quantity of items held, real wealth (houses, cars, fractions of a company owned), is not increasing that fast, just the prices. Been there, done that."
Bill Dunkleberg also stated:
"After two months of incremental but solid gains, the Index gave up in June. This appears par for the course, given that there is no reason for small employers to be more optimistic and lots of things to worry about. Washington remains bogged down in scandals and confidence in government's ability to deal with our fundamental problems remains low."
The economy is clearly on "life support" and has been surviving on the "forward pull of consumption" created by the ongoing artificial stimulus programs of the Federal Reserve. However, while the financial markets currently "believe" that the Federal Reserve will reduce their support programs sooner, rather than later, the reality is that this will likely not be the case.
As stated above, with the Affordable Care Act set to start increasing costs on individuals by the end of this year, an outright brawl between the branches of the government over the budget, spending and taxes, and weakening exports due to a ongoing global recessionl; the economy faces a very tough battle for recovery from here. While the Federal Reserve has a very limited ability to impact real economic growth - the lack of fiscal policy from Washington has put the economy in danger of slipping back into a recession if not handled very carefully. While Bernanke may hint at reducing the current forms of "life support" the reality is that this could be much more problematic to actually do.
The latest NFIB report goes to confirm many of those suspicions.
Source: Street Talk Live
