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NFIB: Not Much Holiday Cheer

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    December 13, 2013

    The latest release of the small business survey by the National Federation of Independent Business (NFIB) showed only a small rise in optimism following the government shutdown in October.  As discussed previously in “NFIB: Optimism Fades”

    “Two components, the outlook for business conditions and the outlook for real sales gains, accounted for 52 percent of the Index decline. A weaker outlook for business produced dissatisfaction with inventory stocks, and fewer plans to create new jobs. The average value of the Index since the recovery started is 91, 8 points below the 35 year average through 2007 and well below readings typically experienced in a recovery. The current reading is hardly something to cheer about.

    Unfortunately, the overall situation did not improve much in November as would have been expected by the onset of the holiday shopping season which did lead increases in employment needs but economic expectations deteriorated.  From the NFIB:

    “Owner sentiment increased by 0.9 points to 92.5, a dismal reading as has been the case since the recovery started. Over half of the improvement was accounted for by the labor market components which is certainly good news, lifting them closer to normal levels. Expected business conditions though deteriorated further – lots of dismal views of the economy coming next year. The Index has stayed in a “trading range” between 86.4 and 95.4 since the recovery started, poor in comparison to an average reading of 100 from 1973 through 2007.”


    The weakness in the NFIB survey also discounts the surging optimism seen in the recent releases of the ISM and Federal Reserve regional manufacturing surveys.  As seen in the Q3 GDP report, the bulk of the activity seen by manufacturers has been an inventory restocking cycle after a very sluggish end of 2012 and beginning of 2013.  That cycle has likely run its course, and we are likely to see weaker trends emerge in those surveys in the months ahead to correspond with what the NFIB is already reporting.  This is seen in the drop in percentage of firms expecting economic improvement over the next 6-months, currently at -20, which is only slightly above the lows seen during the financial crisis.


    Of course, the ongoing weakness in economic expectations does not bode well for the two main drivers of economic growth in the future – corporate capital expenditures and employment.  The downturn in November suggests that the upcoming employment surveys will likely continue their string of disappointing job growth statistics which lie below the headline numbers..


    One thing I have been discussing at length is the upcoming impact of the Affordable Healthcare Act on individuals and businesses in the months ahead.  Higher costs to individuals will reduce disposable incomes and ultimately create weaker future demand.  When the ACA mandate for businesses begins the impact of higher healthcare costs will increase defensive activities, such as employment reduction, to maintain profitability.  The chart below shows the percentage of business expecting higher sales in the next 3-months as compared to those thinking this is a “good time to expand.”


    As you can see, there has been little improvement in businesses thinking that this is a good time to expand as they remain at levels seen near the depths of the last recession.  The NFIB’s Chief Economist Bill Dunkleberg also touched on my concerns about the impending effects of the ACA:

    There is a hint that owners are getting an inkling of what Obamacare might mean for labor costs, concern about the cost and availability of insurance bumped up 3 percentage points after a long period of no real change.  Small firms aren’t currently required to provide insurance (this could change in the future of course), but many do. These owners may find their insurance plans ‘unacceptable’ to Obamacare and be obliged to either pay more for coverage or abandon it and pay the benefit in cash. This will certainly be a source of angst and confusion in 2014.

    The year is not ending on a high note in the small business sector of the economy. The ‘bifurcation’ continues, the ‘Fortune 500’ are performing well with the stock market hitting record levels. But the small business sector is showing little growth beyond that driven by population growth. Since January 1st, the S&P has added $3.8 trillion in value – but have output and profits really increased that much? Or is this the work of the Federal Reserve which has voted to leave rates unchanged in the last 39 meetings, and likely adding to this total in December. Maybe fiscal policy will get on course and give owners something to cheer about.”

    Dunkleberg’s viewpoints are critically important to process.  Despite the “statistical” recovery of government reported data – the “real” recovery on “Main Street” is far less robust. The infusion of $30 Trillion in bailouts, stimulus, and supports has generated only $1.5 Trillion of economic growth since January, 2009.  This is a poor return on investment no matter how you analyze it.  As Deutsche Bank, via Zero Hedge, recently stated:

    We think that something structurally has changed since the GFC, a change that seems destined to continue to hold back growth in the near-term and more worryingly has lowered the longer-term trend rate of growth. In the absence of structural reforms, a lack of appetite for debt restructuring and no ability to pursue more aggressive fiscal policy, the temptation will be strong globally to continue to throw liquidity at the problem which is likely to continue to have more impact on asset prices than the actual economy. Bubbles could easily form which could ultimately be the catalyst for the imbalances that will likely lead to the next recession or crisis.

    So to avoid bubbles we possibly need the US and the global economy to have a stronger year and for activity to withstand the impact of tapering and the inevitable higher yields that this combination would bring. The jury is still out as to whether this can happen though and it might be that the US needs very low yields by historic standards to maintain a recovery. It might also be the case that the rest of the world needs low US yields too. 2014 will be a test of this.

    The detachment between the financial markets and the real economy continues while history suggests that such detachments are not permanent.  As Deutsche Bank concludes:

    There’s still too much leverage for us to believe that accidents won’t happen with the removal of too much stimulus. If we’re correct, we may see a reaction somewhere to tapering and this in turn may force the Fed into a much slower tapering path than it wants.”

    Low yields are not conducive to productive investment, and the lack of demand combined with low economic growth rates keep businesses on the defensive.  I wrote previously that:

    The uncertainty surrounding the economy that currently exists limits the ability for businesses to plan.  While the country can continue to run without a budget, as long as there is ‘ink for the printing press,’ small businesses do not have that luxury.  For businesses, their outlook is driven by those silly little economic factors like supply, demand and profits.  While it may currently seem to be a statement by businesses on the results of the election – it is more of an outlook on the future of the economy and how their personal livelihoods are going to be affected.”

    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 artificially inflated asset prices does little to increase consumptive capacity for a vast majority of Americans that live paycheck to paycheck.  Until there is 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.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After 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.


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