Zero employment growth: “one of the best performances in years.”
via NFIB
The National Federation of Independent Business Index of Small Business Optimism gained 2.7 points in October rising to 91.7, not a huge move, but at least a decent jump, perhaps anticipating an acceleration in economic activity.
Still, the Index remains in recession territory. Consumer spending and consumer sentiment remain weak, indicating that top line growth on Main Street will remain sluggish. The profit picture did improve, supported by increased reports of quarter-to-quarter positive sales trends. However, both sales Index components are still very negative historically but are heading in the right direction.
Employment
Average employment growth per firm was 0 (zero) in October, one of the best performances in years. Employment change has been negative in all but two quarters since April of 2007. Reaching the 0 (zero) change level raises the odds that Main Street may contribute to private sector job growth for the first time in over a year. Ten percent have one or more current job openings, down a point from the prior month.
Over the next three months, 8 percent plan to increase employment (unchanged), and 13 percent plan to reduce their workforce (down three points), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, a four point gain from September.
Capital Spending and Outlook
The frequency of reported capital outlays over the past six months rose two points to 47 percent of all firms, three points above the 35-year record low. Of those making expenditures, 32 percent reported spending on new equipment (up two points), 16 percent acquired vehicles (up one point), and 12 percent improved or expanded facilities (up two points). Three percent acquired new buildings or land for expansion (down one point), and 9 percent spent money for new fixtures and furniture (down one point). The percent of owners planning capital outlays in the future fell a point to 18 percent.
“The environment for capital spending is still not good,” said William C. Dunkelberg, NFIB’s chief economist. “Interest rates are low, but the record long recession has eroded financial strength. More importantly, the prospects that investment spending and/or hiring will somehow increase profits remain weak, even if improving slightly.”
Seven percent characterized the current period as a good time to expand facilities (seasonally adjusted), up one point from September. And a net 8 percent expect business conditions to improve over the next six months, an 11 point gain that builds on a five point improvement in September.
Sales and Inventories
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months improved four points to a net-negative 13 percent, 20 points better than May 2009 (the recession bottom) but still indicative of very weak customer activity. Unadjusted, 22 percent of all owners reported higher sales (last three months compared to prior three months, down one point) while 31 percent reported lower sales (down three points). Widespread price cutting continued to contribute to reports of lower nominal sales.
“Overall, it does not appear that sales trends are supportive of a recovery in the small business sector just yet, but they were a bit stronger in October than September,” said Dunkelberg.
The net percent of owners expecting higher real sales gained four points from September, rising to a net 1 percent of all owners (seasonally adjusted). Not seasonally adjusted, 24 percent expect improvement over the next 3 months, 35 percent expect declines.
Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock. A net-negative 16 percent of all owners reported inventory increases (more firms cut stocks than added to them, seasonally adjusted), two points worse than September. Unadjusted, 10 percent reported gains in inventory stocks (down one point), but 25 percent reported inventory reductions (up one point).
Inflation
The downward pressure on prices appears to be easing as more firms are raising prices and fewer are cutting them. Fourteen percent of the owners (up two points) reported raising average selling prices, and 22 percent reported average price reductions (down two points). Seasonally adjusted, the net percent of owners raising prices was a net-negative 5 percent, a six point increase. Still, October is the 23rd consecutive month in which more owners reported cutting average selling prices than raising them, a condition that might support concerns about deflation now worrying the Federal Reserve.
On the cost side, 4 percent of owners cited inflation as their number one problem (e.g. costs coming in the “back door” of the business) and only 3 percent cited the cost of labor as theirs. So, neither labor costs nor materials costs are pressuring owners to raise prices.
Earnings
Reports of positive earnings trends posted a seven point improvement in October, registering a net-negative 26 percent. Still, far more owners report that earnings are deteriorating quarter-to-quarter than rising.
“The persistence of this imbalance is bad news for the economy since profits are important for the support of capital spending and expansion,” said Dunkelberg. Not seasonally adjusted, 15 percent reported profits higher (down one point), but 40 percent reported profits falling, a five point decline.
Of the owners reporting higher earnings, 60 percent cited stronger sales as the cause and 7 percent each credited lower labor costs and higher selling prices. For those reporting lower earnings compared to the previous three months, 60 percent cited weaker sales, 3 percent blamed rising labor costs, 8 percent higher materials costs, 3 percent higher insurance costs and 8 percent blamed lower selling prices. Five percent blamed higher taxes and regulatory costs.
Credit
Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported credit needs not satisfied, and a record 52 percent said they did not want a loan. Only 3 percent reported financing as their top business problem.
However, 30 percent of the owners reported weak sales as their top business problem, followed by 20 percent citing taxes and 17 percent government regulations and red tape (taxes that consume capital and time).
“The historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new workers are not likely to pay the business back,” said Dunkelberg. “This is a major cause of the lack of credit demand observed in financial markets.”
