NFIB: small business sector remains in a "rut" and unable to find reasons to ramp up hiring

NFIB Small Business Report

We can certainly "hope for change"here,

but history warns against a lot of optimism.

 

Summary
January 2011 (released 1/11/2011)

Optimism Index

The Index of Small Business Optimism lost 0.6 points in December, dropping to 92.6, not a huge change but not the hope-for rebound that would signify more growth in the small business sector. Apparently, the "management change"in Washington and marginally better retail sales numbers were not enough to pump up spirits at the New Year celebrations. This marks the 36thmonth of recessionary levels. Only once in that period did the Index get above 93 (last month) and has been below 90 for 26 months. (Dec. 2010 reading 4.6 points greater than Dec. 2009 however it is 8.8 points lower than Dec. 2005)

Labor Markets

Thirteen (13) percent (seasonally adjusted) reported unfilled job openings, a four point improvement that anticipates a reduction in the unemployment rate in the coming months. Over the next three months, 10 percent plan to increase employment (up one point), and nine percent plan to reduce it (down three points), yielding a seasonally adjusted netsix percent of owners planning to create new jobs, a two point gain from December and the best reading in 27 months. Until sales picks up, there is nopressing reason to hire. The reduction in the payroll tax will add some impetus to hiring as most of that addition to take home pay will likely be spent.

Capital Spending

The frequency of reported capital outlays over the past six months fell four points to 47 percent of all firms, disappointing and only three points over the record low level. Eight percent characterized the current period as a good time to expand facilities (seasonally adjusted), down one point but six points better than earlier in the year and the third highestreading since the economy peaked in December 2007. A net nine percent expect business conditions to improve over the next six months, down seven points from November’s rather astonishing reading (the level of optimism we had been hoping for) but historically decent. It is the second best reading since the 4thquarter of 2009 when the economy was expanding rapidly. Apparently the future is looking brighter for more owners, although much will depend on what Congress does early in 2011.

Profits and Wages

Reports of positive earnings trends fell four points in December, registering a netnegative 34 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising. Partof this is due to price cutting, which is fading in frequency as the economy continues to grow. Not seasonally adjusted, 14 percent reported profits higher (down one points), but 47 percent reported profits falling, a four point increase. For those reporting lower earnings compared to the previous three months, 55 percent cited weaker sales, four percent blamed rising labor costs, six percent higher materials costs, two percent higher insurance costs, two percent higher financing costs, and four percent blamed lower selling prices. Six percent blamed higher taxes and regulatory costs. Large firms may be posting great profits, but the trend on Main Street is not supportive of solid hiring and capital spending. Labor cost, materials costs, interest rates –not the problem. It is still weak sales.Seven percent reported reduced worker compensation and 11 percent reported gains. Seasonally adjusted, a neteight percent reported raising worker compensation, unchanged from November. Labor costs are not a problem for inflation yet but are not fading any longer.

Credit Markets

Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported that not all of their credit needs were satisfied, and 50 percent said they did not want a loan, down three points. Thirty (30) percent of all owners reported borrowing on a regular basis, up two points from the record low.A net12 percent reported loans "harder to get"compared to their last attempt (asked of regular borrowers only), up one point from November. Reported and planned capital spending are still hovering around survey recordlow levels, but are showing reluctant improvement.

Commentary

It appears that the small business sector remains in a rut”, unable to find reasons (drained by a 2 plus year recession period) to ramp up hiring and capital spending. The top problem remains weak sales, spread over too many firms. With weak sales prospects, hiring or spending on capital projects have little likelihood of paying off and therefore willnot happen. Congress passed or tried to pass a ton of legislation that had little to do with helping the economy. It is no wonder that consumers and owners are in a canyon of pessimism, the recession took a huge economic toll and the leadership inspired fear, not confidence. With the small business sector on the sidelines, it is hard to get national growth above the 2 to 3 percent range and the economy will not enjoy the type of rebound experienced after 1982 when GDP grew eight percent for over a year.