The National Federation of Independent Business reported Tuesday a decline in optimism among small business owners in June after a promising three-month run.
The NFIBs June Optimism Index fell 1.6 points to 95.0. Even though job components improved, capital outlays and planned spending faded along with expectations for improving business conditions. Overall only two Index components improved, two were unchanged, and six fell.
The only two index components that increased in June were labor market indicators: the percent of owners with job openings and the percent planning to create new jobs in the coming months, said NFIB chief economist Bill Dunkelberg in a statement. While reports of actual net job creation per firm were positive, consumer and business owner optimism remain low, with both spending growth and sales expectations weak. This means there are more jobs but not much more output. With election day months away and no sign of change in Washington, economic growth for the rest of the year will continue to be sub-par. The unemployment rate will fall more due to people leaving the labor force than to jobs being created and fewer hands making GDP.
Small business owners surveyed by the NFIB indicated they increased employment by an average of 0.05 workers per firm in June (seasonally adjusted), the ninth positive month in a row and the best string of gains since 2006. Seasonally adjusted, 12% of the owners (up 1 point) reported adding an average of 3.3 workers per firm over the past few months. The remaining 75% of owners made no net change in employment. Fifty-three percent of the owners hired or tried to hire in the last three months and 43% (81% of those trying to hire or hiring) reported few or no qualified applicants for open positions.
Twenty-six percent of all business owners polled by the NFIB reported job openings they could not easily fill in the current period (up 2 points), suggesting more downward pressure on the unemployment rate. Fourteen percent reported using temporary workers, unchanged for several months.
Job creation plans continued to strengthen and rose 2 percentage points to a seasonally adjusted net 12%, approaching normal levels for a growing economy (even with no growth last quarter) and the best reading since 2007. Not seasonally adjusted, 18% plan to increase employment at their firm (down 3 points), and 5% plan reductions.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months fell 1 point to a net negative 2%. This is among the best seasonally adjusted readings since early 2012 when the economy temporarily reached a more normal growth rate. Thirteen percent cite weak sales as their top business problem, one of the lowest readings since December 2007, the peak of the expansion.
Expected real sales volumes posted a 4 point decline, falling to a net 11% of owners expecting gains. Unadjusted, 38% expected higher real sales volumes in the next three months, while 20% expected reductions. Lower expected sales volumes offers no motivation for owners to hire or order more inventories.
Earnings trends deteriorated 1 point to a net negative 18% (net percent reporting quarter to quarter earnings trending higher or lower), still one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, but there appears to be an improvement in profit trends in place, even if not historically strong. This is one of the best readings since mid-2007 with the exception of a few months in early 2012 when the economy posted decent growth rates for several quarters.
Two percent reported reduced worker compensation and 24 % reported raising compensation, yielding a seasonally adjusted net 21% reporting higher worker compensation, up 1 point and among the best readings since 2008. A net seasonally adjusted 13% plan to raise compensation in the coming months (down 2 points), still one of the strongest reading since 2008. The reported gains in compensation are now solidly in the range typical of an economy with solid growth.
Six percent of the owners reported that all their credit needs were not met, up 1 point and 2 points above the record low. Twenty-seven percent reported all credit needs met, and a record 54% explicitly said they did not want a loan (67% including those who did not answer the question, presumably uninterested in borrowing as well). Only 3% reported that financing was their top business problem compared to 22% citing taxes, 20% citing regulations and red tape and 13% citing weak sales.
The pace of inventory reduction was steady, with a net negative 4% of all owners reporting growth in inventories (seasonally adjusted). The net percent of owners viewing current inventory stocks as too low was unchanged at a net negative 2%, still a lean reading. Sales trends deteriorated a bit but remained at the best levels in the recovery, just historically weak. Expected real sales weakened as well, and this contributed to less urgency to rebuild stocks. The net percent of owners planning to add to inventory stocks fell 2 points to a net negative 1%. While inventories have been building solidly at the national level (a car inventory bubble), it appears that the small business sector is adding only a little to the accumulation of stocks reported in the GDP accounts and sales are too weak to produce much liquidation.
Ten percent of the business owners surveyed by the NFIB reported reducing their average selling prices in the past 3 months (up 2 points), and 23% reported price increases (down 2 points). Seasonally adjusted, the net percent of owners raising selling prices was 14%, up 2 points from May and 15 percentage points from December.
Twenty-two percent plan on raising average prices in the next few months (unchanged). Only 3% plan reductions (up 1 point), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 21% plan price hikes (unchanged and the fourth highest level since 2008). If successful, the economy will see a bit more inflation as the price indices seem to be suggesting.
In conjunction with the release of the NFIB survey, Sageworks, a provider of information on private companies, reported that its data on companies with $10 million and under in annual revenue showed that sales have been a healthy 7.8 to 9% over the last two years, while net profit margins have increased. While the data show that small businesses are posting healthy gains, according to Sageworks, increased profits over flat sales may suggest that these companies have been cutting costs. Small businesses are seeing strong performance since recession, growing sales at an annual rate of close to 8%. Small businesses have also increased their margins.
Michael Cohn is the editor in chief of accountingtoday.com
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