In the last review of the National Federation of Independent Businesses survey, I discussed the overall subdued levels of optimism by small business owners.
"The December report showed that small business optimism did end the year slightly higher than November coming in at 93.9. Unfortunately, this is still well below the previous 3 mid-year readings of over 94 and 6 points below the pre-recession average."
The survey for February brought the string of recent improvements to an end as the overall index fell by 2.7 points to 91.4. There really wasn't much on the positive side of the ledger this month as plans to increase capital outlays improved only by 1 point and plans to raise worker compensation increased by 3 to 14%. Unfortunately, employment fell by 5 points to 7% while plans to increase inventories shrank by 2 to -5%. Small business owners expecting economic improvement retreated by 8 to -19% as expectations of higher real sales plummeted by 12 to 3%. Lastly, those owners thinking this is a "good time to expand" fell by 2 to 6%.
Bill Dunkleberg, Chief Economist of the NFIB noted:
""Small business optimism continues its winter hibernation with the latest Index dropping 2.7 points to 91.4, a reading that historically has been associated with recessions and periods of sub-par growth. The one highlight in the January survey, a surge in hiring plans, was crushed in February by the continued onslaught of a wintry recovery now in its 5th year.
As shown in the chart above, the small business confidence index retreated sharply from levels that have proved to be stubborn resistance. While it is likely that many will blame the recent streak of cold weather for the decline, the fact that the survey remains at levels normally associated with recessions is something entirely more worrisome.
Furthermore, the issue of sales expectations versus actual sales continues to be a key issue. With each passing month, there has been significant "hope" that consumer demand is going to pick up in the near future. However, actual sales have failed to occur. The chart below shows the historical relationship of expected sales over the next quarter versus what actually happened in the past quarter. Last month, I discussed that the current divergence was quite extreme.
"In the months ahead there will either be a very sharp pickup in consumption or expectations will fall."
That reversion occurred in February as expectations of higher real sales plunged from 15 to 3. From the NFIB:
"As disturbing as the decline in job creation plans was, the plunge in expectations for improvements in real sales in the coming months and for business conditions 6 months from now, is undoubtedly the reason for the decline in hiring plans. Averaging 22 percent from 1973 through 2007, a net 22 percent expected real sales volumes to rise in the following 3 month period. In February, it was a meager net 3 percent."
The Status Quo Of Uncertainty
As I discussed last month, the President's use of his "pen and phone" to extend the corporate mandate of the ACA by another year was viewed by many to be a positive for businesses with less than 100 employees. As I suggested, the reality would be quite different.
"Small business owners are excellent allocators of capital. They deal daily with changes in demand, supply and impact of their decisions on profitability. When a new requirement, tax or regulation is imposed, business owners adjust accordingly making strategic decisions and moving forward.
The problem currently is that when the President arbitrarily changes rules or regulations, it leaves business owners in a state of uncertainty. Rather than knowing for certain what the costs and requirements will be under the Affordable Care Act and being able to adapt accordingly, they are now left in a state of uncertainty for another year. This will continue to suppress hiring and capital expenditure plans as the inability to plan means retaining more capital for an uncertain expense in the future."
The chart below is a reflection of the three biggest impediments to small business planning, hiring and capital expenditures - government regulations (i.e. ObamaCare), taxes and poor sales.
With the President continuing to push legislative action through executive orders, such as immigration or income inequality reforms, is it any wonder that the "Small Business Concern Composite Index" remains near its highest levels on record?
In the recent personal spending report, we saw spending rise not due to a more aggressive consumer, but rather due to higher utility bills and healthcare costs. The Affordable Care Act (ACA) guarantees higher taxes and insurance premiums on both individuals and business owners. Many businesses will see their premiums increase sharply this year as their annual policy renewals take effect. However, this does not include what will happen to their costs should their current policies not comply with the new requirements. The inability to plan for what the actual impact of the ACA will be in another 12 months will keep business owners on the defensive as was noted by Bill Dunkleberg:
"Uncertainty is a major cause of the reluctance to spend and hire. Large firms are loaded with cash but unwilling to spend. For small firms, record low numbers are reporting the current period as a good time to expand, for 5 years and running. More firms are reducing inventory than adding to it, even in a growing economy. And more firms are expecting a deterioration in the economy than an improvement. In NFIB's Problems and Priorities survey, uncertainty about the economy and government policy both rank in the top 5 most severe problems facing small business owners. You don't bet your money on a future you cannot see clearly."
The chart above shows the deterioration in economic confidence by small businesses as the recent "inventory restocking cycle" has begun to fade. While surging asset prices, driven by artificial stimulus, may boost confidence for the top 10% that actually have investible assets, for the rest of America it has little affect on their ability to make ends meet. Wage growth primarily remains stagnant as the cost of living continues to rise.
Of course, this is something that the current Administration is well aware. This is why there is a continued focus on policies such as "income inequality" that, while bad for the long term economy, will garner votes in the short term.
"The economy is not doing well and little is happening in Washington that would lead owners to think otherwise. Even the Federal Reserve's guidance is for a weak economy, that's what owners read and they are the experts (and policy makers). All policy is focused on the election, pandering to special interests, not the interests of the "middle class" (most of us) which simply wants to see better economic growth and serious job creation (along with improving compensation). Consumer sentiment is equally morose for this stage of a "recovery". Only 1 in 10 consumers think government policy is good. The IRS is still taking the 5th and the DOJ investigator sends campaign money to the Democrat party. None of the 'issues' are resolved; those involved hoping to stall long enough for other crises to shove them off the front pages - maybe Putin will save them. But the stock market is hitting new highs, so I guess we should all cheer."
The good news is that the recent softness in the economic data will likely lead to a bounce due to short term "pent up" demand. However, that bounce, like all those previously, will both be over reported and short lived. It would seem logical that since small businesses create the bulk of employment, someone in Washington might want to discuss what they require to boost employment. Unfortunately, "logic" seems to be in short supply in Washington, D.C.