altman waiter: Small Business Sentiment Up Slightly - Still Depressed

The latest issue of the NFIB Small Business Economic Trends is out today (see report). The February update for January came in at 88.9, which puts it at the 10th percentile in this series.

Here is the opening summary of the report:

Small-business owner confidence continues to drag, according to the National Federation of Independent Business (NFIB) Small Business Optimism Index. The Index gained 0.9 points, rising to 88.9, failing to regain the losses caused by last month's "fiscal cliff " scare. Expectations for improved business conditions increased by five points, but remain overwhelmingly low?negative 30 percent?the fourth lowest reading in survey history. Actual job creation and job creation plans improved nominally, but still not enough to keep up with population growth.
"The Optimism Index barely budged in January. The only good news is that it 'budged' up, not down. If small businesses were publicly traded companies, the stock market would be in shambles. While corporate profits are at record levels as a share of GDP, small businesses are still struggling to turn a profit," said NFIB chief economist Bill Dunkelberg. "With the dismal news that our economy actually contracted in the fourth quarter of 2012, it isn't any wonder that more small firms expect their real sales volumes to fall, few have plans to invest in new inventory, and hardly any owners are expanding or hiring. Owner pessimism is certainly not surprising in light of higher taxes, rising health insurance costs, increasing regulations and just plain uncertainty. The President will address the state of our nation tonight, but he apparently won't have much that's positive to relay to our small-business community?not while the pall of uncertainty over economic policy continues to depress investment spending and growth."

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.

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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.

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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 over the past three months improved 1 point to a negative 9 percent. The five year high of a net 4 percent was reached in April last year. Nineteen (19) 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 1 point to a negative 1 percent of all owners (seasonally adjusted). The pace of inventory reduction continued with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), 3 points better than December, but still more owners reducing stocks than adding to them. But, with rather dismal sales expectations, plans to add to inventories remained weak at a net negative 7 percent of all firms (seasonally adjusted), 3 points worse than December.

Credit Markets

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, unchanged from December. Thirty-one (31) percent reported all credit needs met and 3 percent reported that financing was their top business problem. Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 2 points from December and historically low. A net 7 percent reported loans "harder to get" compared to their last attempt (asked of regular borrowers only), 2 points lower than December. The average rate paid on short maturity loans was 5.5 percent, stuck at much the same level for years.

Labor Markets

The NFIB labor market indicators are at recession levels despite a tiny increase in job creation.

Forty-three (43) percent of the owners hired or tried to hire in the last three months and 34 percent (79 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. More owners are now reporting net hiring than are reporting reductions, a positive development if it holds up.

NFIB Commentary

This month's "Commentary" section includes some discussion of GDP and expectations about sequestration:

Bad news continued to dominate the information flow to business owners. GDP actually fell in the fourth quarter, and grew less than 2 percent for all of 2012. A sharp decline in defense spending subtracted about 1.3 percentage points from the growth rate, a warning as to what might happen if sequestration actually occurs with no deal to change its magnitude and timing. A sharp decline in inventory building also knocked a point or more off the GDP growth rate. But even if those events had not occurred, overall growth would have still been around 2 percent, not enough to produce the jobs needed to reduce unemployment meaningfully. Indeed, the unemployment rate went up. Now the focus is on what Congress will do to avoid the sequestration and deal with the debt limit. Odds are a deal will be reached, but uncertainty reigns, just what it will look like, how much more in tax revenue and how meaningful spending reductions will be is very unclear. As a consequence, uncertainty about the growth in the economy and economic policy continues to depress investment spending and hiring and keeps consumers depressed and spending less as well.

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.

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