December Report: Small-Business Owner Confidence Plunges More than Five Points
One of the lowest optimism readings in survey history
The NFIB Small Business Optimism Index dropped 5.6 points in November, bottoming out at 87.5. The two major events in November were the national elections and Hurricane Sandy, which devastated parts of the East Coast. To disentangle these, the results for the states impacted by Sandy were excluded from the computation for comparison. When separating the hurricane-impacted states from the remainder, the data makes clear that the election was the primary cause of the decline in owner optimism.
“Something bad happened in November—and based on the NFIB survey data, it wasn’t merely Hurricane Sandy. The storm had a significant impact on the economy, no doubt, but it is very clear that a stunning number of owners who expect worse business conditions in six months had far more to do with the decline in small-business confidence. Nearly half of owners are now certain that things will be worse next year than they are now. Washington does not have the needs of small business in mind. Between the looming ‘fiscal cliff,’ the promise of higher healthcare costs and the endless onslaught of new regulations, owners have found themselves in a state of pessimism. We are forced to ask: is this the new normal?” -- NFIB chief economist Bill Dunkelberg
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This survey was conducted in November 2012. A sample of 3,938 small-business owners/members was drawn. 733 usable responses were received for a response rate of 19%.
December SBET Report with Holly Wade
NFIB Chief Economist on CNBC
The most significant factor impacting the decline in optimism is the expectation that future business conditions will be worse than current ones. The net percent of owners expecting better business conditions in six months fell 37 points to a net negative 35 percent. In October, the percent of owners who said they were uncertain as to whether business conditions would be better or worse in six months hit a record low of 23 percent. Many of those who were uncertain about the economy in October became decidedly negative in November; 49 percent of the owners now expect business conditions to be worse in six months, while 11 percent still express uncertainty about the future.
In the history of the monthly Index, only seven readings were lower, all but one in the last few months of 2008 and early 2009, the depths of the last recession. Prior to 1986 (when the survey was conducted on a quarterly basis), there were just two readings lower, 1975Q1 and 1980Q2.
Highlights
- Hurricane Sandy: To examine the impact of the hurricane, the Index components were calculated excluding responses in the states impacted by Sandy. Overall, there were no significant differences, with net declines in positive responses of 64 percentage points among hurricane victims and 67 percentage points among owners in the rest of the country. Understandably, capital spending plans were slightly higher among the Sandy victims and labor force indicators were slightly worse. These data suggest that the decline in optimism was not related to Sandy per se, as sentiment fell everywhere. The only other significant event was the resolution of the election, an event that had created much uncertainty among business owners as to the future direction of economic policy and the economy.
- Job Creation: The major impact of Hurricane Sandy in the affected states was on the job markets. Nationally, job creation weakened slightly from the previous month, with the average change in employment per firm falling to -0.04 from 0.02 workers, essentially zero. Four million fewer Americans are employed today than in the first quarter of 2008. Hurricane Sandy’s impact on the thousands of small firms that were shut down along the East Coast was a significant reduction in hiring. When segregating the responses in the “Sandy States” (NJ, DE, NC, DC, VA, WV, MD, MA, CT and eastern portions of PA and NY) from the rest of the U.S., it is clear that there was less hiring and more job loss in Sandy States. Job openings were fewer in number and, looking ahead to the next few months, more owners in those states planned to reduce employment that in the rest of the country, although the same percentage planned to create new jobs. Reports of actual employment change were 8 points worse in the Sandy states. Many firms could not open for business and face an uncertain future, leaving plans to reduce employment 7 points higher there than in the rest of the U.S. The Labor Department report that there were no significant effects from the hurricane contrasts with the NFIB results in this regard.
- General Business Conditions: The most significant factor impacting the decline in optimism is the expectation that future business conditions will be worse than current ones. The net percent of owners expecting better business conditions in six months fell 37 points to a net negative 35 percent.. Not seasonally adjusted, 9 percent expect an improvement in business conditions (down 5 points), and 49 percent expect deterioration (up 30 points). Twenty-three percent reported “poor sales” as their top business problem, up 1 point. Overall, this is a poisonous climate for investment and expansion. Twenty-three (23) percent of owners still cite weak sales as their top business problem; this is historically high but down from the record 34 percent reading last reached in March 2010. The net percent of owners expecting higher real sales fell 8 points to a negative five percent of all owners (seasonally adjusted), 17 points below the 2012 high of net 12 percent reached in February. Not seasonally adjusted, 19 percent expect improvement over the next three months (down 6 points) and 43 percent expect declines (up 9 points). The percent of owners planning capital outlays in the next three to six months fell 3 points to 19 percent. Six percent of owners characterized the current period as a good time to expand facilities (down 1). This compares to 14 percent of owners who felt positive about expansion in September 2007.
- Credit Markets: Six percent of owners reported that all their credit needs were not met, down 2 points from October. Twenty-eight (28) percent of owners reported that all credit needs met, and 52 percent explicitly said they did not want a loan (66 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only three percent reported that financing was their top business problem, compared to 23 percent citing taxes, 23 percent citing weak sales and 18 percent citing unreasonable regulations and red tape. Thirty percent of all owners reported borrowing on a regular basis, unchanged from October. There are slight indications that credit may be more difficult to obtain; a net nine percent of owners reported loans are “harder to get” compared to their last attempt (asked of regular borrowers only), 2 points higher than October. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10 percent (more owners expect that it will be “harder” to arrange financing than easier), 2 points worse than in October.
SBET INDEX SUMMARY
Optimism Index
The Index of Small Business Optimism declined 5.6 points, one of the largest declines in survey history. The Index has been lower only 7 times since the monthly surveys were began in 1986. Prior to 1986, just two readings were lower, in 1975Q1 and 1980Q2. There were two major events shaping the November results, the election and hurricane “Sandy.” What is quite clear from the data is that the election was the primary cause of the decline in owner optimism, not the hurricane, although hurricane effects were apparent.
LABOR MARKETS
The plunge in owner optimism did not drag the labor market indicators down proportionately, but they were at recession levels to begin with. Job creation weakened a bit from the October reading, with the average change in employment per firm falling to -0.04 from 0.02 workers. Ten (10) percent of the owners (down 1 point) reported adding an average of 2.4 workers per firm over the past few months, and 11% reduced employment (up 1 point) an average of 3.1 workers (seasonally adjusted). The remaining 79% of owners made no net change in employment. Forty-six (46) percent of the owners hired or tried to hire in the last three months and 36% reported few or no qualified applicants for open positions. Overall, little change from October numbers, though leaning in a negative direction. The percent of owners reporting hard to fill job openings rose 1 point to 17% of all owners. Job creation plans remained weak, with a net 5% planning to increase employment, up a point from October but historically a weak number for a recovery period.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was unchanged at a negative 15%. Twenty-three percent still cite weak sales as their top business problem, historically high, but down from the record 34% reading last reached in March 2010. Consumer spending remains weak, especially on services although auto sales have recently shown some strength. The net percent of owners expecting higher real sales fell 8 points to a negative 5% of all owners (seasonally adjusted), 17 points below the 2012 high of net 12% reached in February. The pace of inventory reduction continued, with a net negative 10% of all owners reporting growth in inventories (seasonally adjusted), two points worse than October. For all firms, a net negative 2% (down 2 points) reported stocks too low, a bit less satisfaction with stocks than in October, most likely due to a deterioration in sales forecasts. Plans to add to inventories remained weak at a net negative 5% of all firms (seasonally adjusted), 4 points worse than October. This is consistent with the reported build-up of inventories at the macro level. With expected business conditions and expected real sales in the tank, it is not surprising that inventory demand remains weak.
CAPITAL SPENDING
The frequency of reported capital outlays over the past 6 months fell 1 point to 53%, still in “maintenance mode.” The percent of owners planning capital outlays in the next 3 to 6 months fell 3 points to 19%. Six percent characterized the current period as a good time to expand facilities (down 1) compared to 14% in September 2007. The net percent of owners expecting better business conditions in 6 months was a net negative 35%, a 37 point decline A net negative 5% of all owners expect improved real sales volumes, down 8 points. Twenty-three (23) percent reported “poor sales” as their top business problem, up 1 point. Overall, this is a poisonous climate for investment and expansion.
INFLATION
Fifteen (15) percent of the NFIB owners reported raising their average selling prices in the past 3 months (down 3 points), and 17% reported price reductions (up 1 point)). Seasonally adjusted, the net percent of owners raising selling prices was 0%, down 5 points. With sluggish consumer spending, there is little opportunity to raise prices and make it stick. Twenty-one (21) percent plan on raising average prices in the next few months (up 2 points), 4% plan reductions (unchanged). Seasonally adjusted, a net 16% plan price hikes, unchanged. It appears that the Fed’s forecast (hope) for continued low inflation is a reality on Main Street.
EARNINGSS AND WAGES
Reports of positive earnings trends lost ground in November, falling to a net negative 32%. Six percent reported reduced worker compensation and 12% reported raising compensation, yielding a seasonally adjusted net 7% reporting higher worker compensation (down 4 points). A net seasonally adjusted 4% plan to raise compensation in the coming months, down 5 points from October. Earnings are the major source of capital for small firms to finance growth and expansion (and repay debts incurred to invest in their firms). The past and promised increases in regulatory costs and in taxes will diminish the available financial support for growth as well as reduce the expected profitability associated with new investments in the business or new hires.
CREDIT MARKETS
Six percent of the owners reported that all their credit needs were not met, down 2 points. Twenty-eight (28) percent reported all credit needs met, and 52% explicitly said they did not want a loan. Only 3% reported that financing was their top business problem, compared to 23% citing taxes, 23% citing weak sales and 18% citing unreasonable regulations and red tape. Thirty (30) percent of all owners reported borrowing on a regular basis, unchanged from October. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 10% (more owners expect that it will be “harder” to arrange financing than easier), 2 points worse than in October. Whatever QE3 is doing, it isn’t changing the expectations of business owners about credit availability or costs in the coming months.
COMMENTARY BY BILL DUNKELBERG
Apparently the level of uncertainty was not resolved in a way that was supportive of many small-business owners. Out of 377 surveys since the first in 1973, the current reading of the Index of Small Business Optimism is the tenth lowest on record. The decline in the Index from already recession level readings in October was one of the largest on record. Something bad happened, and it wasn’t Sandy based on the NFIB survey data for November, it was the election. Owners in the rest of the country were as bummed out as those in Sandy states.
Some things are more certain, the healthcare law will not be repealed as advertised. The “war” on success is now public policy as the President insists on higher tax rates for the “rich,” those making $250,000 or more. He continues to obfuscate by claiming that only 3% of small-business owners will be impacted, as if even those are not a concern. But the disingenuousness of that statistic masks the fact that the denominator in his fraction is “30 million small businesses.” But, there are, according to Census, only 6 million employer firms, so an accurate assessment of the percentage of employer firms impacted is more like 15%. The President claims that there is not enough revenue in restricting deductions; that eliminating charitable deductions would, for example, put hospitals, universities etc. on the verge of collapse. This assumes that people only give for a tax deduction; this would be news to the Red Kettle Salvation Army collectors! They don’t hand out receipts, and even donors in the highest tax bracket still have to pony up over 60% of any gift out of their own pockets. Charity is not about tax breaks, it about doing good things. Meanwhile, new and proposed changes in regulations proliferate at record rates.
The growth in the third quarter was revised up from 2% to 2.7%. The bad news was that most of the upward revision was in inventory accumulation, government spending and an improved trade deficit, unlikely to be as supportive in the fourth quarter. Consumer spending was revised down substantially as the NFIB sales reports indicated, and there are no signs of improvement. Spending on services was revised down to 0.3% and this is 70% of consumer spending and a sector that is dominated by small business (education and health care aside). Consumer sentiment (University of Michigan/Reuters) crashed, whatever the cause, it does not bode well for consumer spending. For the millions of unemployed held captive by Washington politics, it will not be much of a “Merry Christmas.”