The National Federation of Independent Business (NFIB) produced its monthly Small Business Optimism Index Tuesday for the month of February. The measure of the small business mood gained for the sixth consecutive month, rising 0.4 points to a mark of 94.3. The NFIB warns that the reading is still low based on historical comparison, and that the rate of improvement is "glacial." We would add that it comes just in time to be undermined by the fiscal and economic failings of Europe and the geopolitical fumbling of the world. In other words, before you get too excited about today's slight victory, take a look at the tough schedule ahead this season.
The popular spin on confidence today will be centered around the positives, including the month's height against its 2007 grounding. That fact will overshadow the truth about its sitting lower than last February, and potentially following the trend of last year, where early gains were undermined. Last year, we saw mostly fear driven decline, though followed by some setback in economic activity. Certainly those same two factors should come into play again this year, given Europe's self-deprecation and the battle fleet sitting offshore of the tinderbox of Iran.
Any fluffing of the data will certainly not be the fault of the NFIB's Chief Economist, Bill Dunkelberg, the guy who probably doesn't remember giving me my undergraduate business degree at Temple University. His view has been wisely tempered throughout the recovery, properly reflecting the cautious mood of the group of typically optimistic entrepreneurs. This month, he noted the "wildcard" that gasoline prices play in the vulnerable small business marketplace. Of course, the last few months climb in petroleum distillates would be dwarfed by what would follow any engagement of Iran in battle. Considering that all the guys opposing President Obama, save Ron Paul, already have their hands on the trigger, concern is well-placed. Yet, it might be better suited today, as wars tend to start in surprising fashion, and big guns already sit with targets set upon one-another.
You might want to note that the details of the survey are anything but enthusing. Some 22% of small business owners, the same number as was reported in January, said their biggest problem was "poor sales" in February. Take note as well that more small businesses reported declining sales than reported rising sales in February. Considering the seminal importance of the core issue, you might want to restrain your natural inclination to tout the four-tenths gain and refrain from your long bets for the long-term. That said, generally speaking over the long-term and under normal business conditions, I would expect more small businesses to fail than to survive, and the survivors to provide more than enough economic value to compensate.
Capital expenditures were up again, but remain near historical lows. What's worse is that few business operators view today as a good time to expand. Not enough of them have real plans to expand in a significant way either. There's a good reason for that I suppose; the number of small business owners expecting better business conditions in six months sits in negative territory. While a significant portion of that figure is certainly determined by business expectations, it's also affected by other factors. Those cited most by small businessmen were taxes and regulation. Surprisingly, credit access was not a central issue. Washington seems to finally be taking notice, with less emphasis on Federal Reserve actions and increasingly more attention upon fair trade and business incentives. Presidential elections tend to focus the attention of public servants well …
While job creation was up in February and over the last three months, plans to increase hiring in the future fell off among the nation's smaller businesses. A greater net of employees were added, yes, but on a greater increase in employees at a smaller number of firms than cut at a greater number of firms. That was generally consistent with the latest improving trends in the government's employment data. However, what's more important, and we paraphrase Eddie Murphy, is what employers have done for us lately. In this case, I mean the near future.
The latest economic data out of Europe, save perhaps today's investor confidence improvement in Germany where the stink of the PIIGS has yet to really bite, has been generally deteriorating. Can you believe it, austerity (read starvation and blood-letting) isn't working? The problem for us, save compassionate hearts should they still exist, is that we sell roughly 20% of our exports into Europe and that Europe buys a bunch of stuff from all over the world. The entangled global marketplace is therefore at risk of noticing European strife, and that's before a Lehman like event could drive swift striking crisis. So the latest tiny gains in small businesses are not impressive and stand at high risk of being undermined.
The market was off to a solid start despite the mediocre small business report Tuesday, instead taking its lead from February's Retail Sales data, which while only showing in-line numbers, still rose 0.6% ex-gasoline and autos. The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 (SPY) and PowerShares QQQ Trust (QQQ) were each up about a half point at the start of trading on that driver. Even the SPDR S&P 600 Small Cap ETF (SLY), which you might expect to better reflect the small business view, was up a half point. That said, I think the omen seen in the expectations of small businessmen will be considered increasingly, and seen in data to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.