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Small Business Sentiment: No Sign Of Real Recovery

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    January 16, 2014

    The latest issue of the NFIB Small Business Economic Trends is out today. The January update for December came in at 93.9, up 1.4 points from the previous month’s 92.5 and the second month of improvement, although headline for the NFIB news release reads “No Sign of Real Recovery”. Today’s overall number is at the 20.5 percentile in this series. Since its initial recovery following its Great Recession trough, this index has been stuck in an extremely volatile range for the past three years. Since January of 2011, it has repeatedly bumped a ceiling around the 94 level and then retreated. It will be interesting to see if this indicator can break above the 94 level in the months ahead.

    Here is an excerpt from the opening summary of the news release.

    Small-business optimism ended the year slightly up from November at 93.9, but below the previous 3 mid-year readings of over 94 and 6 points below the pre-recession average, according to the National Federation of Independent Business’ (NFIB’s) latest index. On the positive front, reports of capital spending rose significantly in December, increasing by 9 points from November and job creation among NFIB firms was the best since February 2006. Hopefully, the promising NFIB job creation and capital spending numbers for December forecast a better 2014.   (Link to news release).

    The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past four years. The NBER declared June 2009 as the official end of the last recession.

    The average monthly change in this indicator is 1.29 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.

    Inventories And Sales

    The findings on small business inventories and sales continue to underscore the general pessimism of the survey. The excerpts below are from the latest monthly report (PDF format).

    The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months was unchanged at a negative 8 percent. Fourteen (14) percent still cite weak sales as their top business problem, but the lowest since June 2008 (the monthly peak was 34 percent in early 2010). The net percent of owners expecting higher real sales volumes rose a solid 5 points to 8 percent of all owners, restoring the September level of positive expectations.

    Credit Markets

    Has the Fed’s zero interest rate policy and quantitative easing had a positive impact on Small Businesses?

    Four percent of the owners reported that all their credit needs were not met, unchanged and an historic low. Thirty-two percent reported all credit needs met, and a record high 55 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 23 percent citing taxes, 20 percent citing regulations and red tape and 14 percent citing weak sales. Thirty (30) percent of all owners reported borrowing on a regular basis, up 1 point but only 2 points above the record low. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up a point from November.

    NFIB Commentary

    This month’s “Commentary” section includes the following observations:

    Economists are raising their forecasts for 2014, but this appears to be based more on “hope” than on any real “change” in the fundamentals. Consumers are a bit more optimistic as are small business owners, but in the context of history, these measures are still weak….

    NFIB’s December survey did provide some positive signals, with the best job creation figure since 2007 and a large increase in the percent of owners reporting actual capital outlays in recent months. The jump of 9 percentage points in December over November suggests that most of the increase in spending came very late in the year. Expectations for real sales growth and for business conditions over the next six months improved substantially over November readings as well. There is not an obvious event that would trigger these gains in the last month of the year, but they are welcome.

    Business Optimism and Consumer Confidence

    The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so I’ve plotted it on a separate axis to give a better comparison of the volatility from the common baseline of 100.

    These two measures of mood have been highly correlated since the early days of the Great Recession.


    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.


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