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NFIB: No Sign Of Economic Improvement

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    April 13, 2013

    While the mainstream analysts and economists keep hoping for a signs of a strengthening economic story to support rising stock valuations and the Fed’s interventionist policies – the data keeps dashing those hopes with cold reality.   Last week I discussed the “Great Disconnect”between the markets and the real economy and the most recent release of the National Federation of Independent Business Small Business survey goes adds more confirming data that central bank interventions are having little effect on the real economy.

    From the report:

    “After three months of sustained growth, the March NFIB Index of Small Business Optimism ended its slow climb, declining 1.3 points and landing at 89.5. In the 44 months of economic expansion since the beginning of the recovery in July 2009, the Index has averaged 90.7, putting the March reading below the mean for this period. Of the ten Index components, two increased, two were unchanged and six declined. Among the greatest declines were labor market indicators, inventory investment plans and sales expectations.”


    “After another false start, small business confidence has sputtered and stalled again. For the sector that produces half the private GDP and employs half the private sector workforce -— the fact that they are not growing, not hiring, not borrowing and not expanding like they should be, is evidence enough that uncertainty is slowing the economy. Virtually no owners think the current period is a good time to expand, because they simply don’t know what the future holds. So why invest? And with the lack of any sustainable fiscal policy or a federal budget, no one’s banking that Washington will be at forefront of any meaningful change. Overall, it appears that there will be little growth coming from the small business half of the economy; as the world economy slows, even big business may suffer.” — NFIB chief economist Bill Dunkelberg

    Reread that highlighted section above.  The small business segment produces half of the private GDP and employs half of the workforce.  Without sparking confidence in the small business sector it is hard to spark a lasting economic recovery story.  The economy is now more than 4 years into an economic recovery yet business sentiment still remains at levels, as noted by the 24 month moving average of the survey, well below levels usually indicative of recessions.

    This lack of confidence quickly translates into hiring decisions as shown in the chart below of the number of business that are planning to hire in the next three months.  Their hiring plans dropped to 0 in March from 4 in February.


    Not only have plans to hire appeared to peak, along with the economy in 2012, there is also a strong correlation between firms plans to hire and the overall annual change in employment.  Of course, this is not surprising given the statement above as to the relative magnitude of small business hiring on total job creation.

    Plans for capital expenditures were unchanged in the most recent report but current levels suggest that these plans are primarily associated with maintenance, upkeep and productivity increases to decrease labor costs rather than expansion.  As we stated in last month’s report on the NFIB Survey:

    “With future economic confidence still at levels lower than ANY past economic recession the recent bump in capital expenditure plans are likely related more to maintenance, upkeep and meeting current demand requirements rather than expansion. While the frequency of expenditures has improved in recent surveys; the levels of those expenditures remain well below what would be characterized as normal growth.”

    As you can see in the chart below with expectations of future economic growth at extremely depressed levels the current level of capital expenditures is likely attributable to productivity increases as plans to increase employment also decline.  Private investment by businesses is a core component of the economic calculation and the current levels of expenditure plans does not support hopes of higher future growth.


    As I have discussed in the past a bulk of the growth that has been seen economically has come merely from population growth.  The problem is that without growth in excess of that rate the economy cannot effectively achieve “escape velocity.” 

    One of my ongoing concerns about the Fed’s continued monetary programs is that while asset prices are rising due to an inflation of a “yield bubble” there has been very little translation of those policies into the real economy.  For example, the Fed’s stated goal is an unemployment rate of 6.5%.  The problem is that at the current rate of individuals leaving the workforce it is likely that the Fed will be able to claim victory even though real unemployment remains at very high levels.  The NFIB shared that concern stating:

    “The Federal Reserve continues to assert its intention to purchase a trillion dollars of Treasury securities and mortgages, adding a trillion dollars to its portfolio and stuffing a trillion dollars of new liquidity into the banking system, until the unemployment rate falls below 6.5% or inflation breaks out. Then it will ‘consider’ changing policy. Unless something really bad happens, this is a winning strategy for the Fed because eventually the private sector will improve, the labor force will shrink (as boomers leave), the unemployment rate will fall and the Fed can claim its policies ‘worked’, even if their policies made no contribution to the improvement or even slowed it down by creating uncertainty and fear among investors and business owners.  This is a risky strategy.”

    The uncertainty surrounding the economy currently limits the ability for businesses to plan.  For businesses their outlook is driven by those silly little economic factors like supply, demand and profits.  Record profits have been driven by suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks.  As I showed previously the gap between profits and employees is at record levels.


    However, those actions are finite in nature and inevitably it will come down to topline revenue growth. However, since consumer incomes have been cannibalized by suppressed wages and interest rates – there is nowhere left to generate further sales gains from in excess of population growth.

    This is why it is important to view this report from the perspective of the business owner.  Business owners are some of the best allocators of capital and resources. They spend money to increase production, expand facilities and hire employees to meet increasing demand. They operate within the confines of the real economic environment, rather than theory, and recent data points to a tougher economic climate ahead.

    Until there is an improvement in the uncertainty that surrounds the economy there is likely very little headway that will be made in the months to come. While further stimulative programs may boost asset markets in the near term it is unlikely that the engines of economic growth will kick in until debt levels are reduced, tax policies are clarified and the regulatory environment is cleared.


    The chart above shows a composite of the top 3 concerns by business owners.  While the concern over “poor sales” has declined in recent months as THE top concern – it has been replaced by government regulations due to the impending implementation of ObamaCare and rising taxes due to higher rates brought on by the “fiscal cliff” deal.  These issues are unlikely going to spur businesses to expand employment, make capital expenditures or increase production other than to maintain current demand levels.  Furthermore, the upcoming budget debate is likely to fuel further concerns should there be little, or no, progress made in changing the outlook for the fiscal health of the country.

    The bottom line is that the environment in which small businesses operate, which has been confirmed by many of the recent data points, does not seem to be improving as much as would have been hoped this far into an economic “recovery.”  

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.