Small Business Sentiment Improves A Bit - No Sign Of A Surge In Confidence

by: Short Thesis Investor

The latest issue of the NFIB Small Business Economic Trends is out today (see report). The March update for February came in at 90.8, which puts it at the 11th percentile in this series.

Here is the opening summary of the report:

The NFIB Small Business Optimism Index increased 1.9 points in February to 90.8. While a nice improvement over the last several reports, the Index remains on par with the 2008 average and below the trough of the 1991-92 and 2001-02 recessions. The direction of February's change is positive, but not indicative of a surge in confidence among small-business owners. Of the ten Index components, one fell, one remained unchanged and eight improved. Most notably, the gains in capital spending and inventory investment plans were large, but by historical standards the levels remain very low.

"While the Fortune 500 are enjoying record high earnings, Main Street earnings remain depressed. Far more firms report sales down quarter over quarter than up. Washington is manufacturing one crisis after another—the debt ceiling, the fiscal cliff and the sequester. Spreading fear and instability are certainly not a strategy to encourage investment and entrepreneurship. Three-quarters of small-business owners think that business conditions will be the same or worse in six months. The Index gained almost 2 points last month; that was good news. But, until owners' forecast for the economy improves substantially, there will be little boost to hiring and spending from the small business half of the economy." -- NFIB chief economist Bill Dunkelberg

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 three 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 sales and sales expectations continue to highlight a fundamental source of distress.

Weak sales is still the top business problem for 18 percent of owners. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged in February, at a negative 9 percent. There are still far more owners reporting declining sales than reporting positive sales trends. Consumer spending remains weak, especially on services although durable goods sales have recently shown some strength. The net percent of owners expecting higher real sales volumes rose 2 points to 1 percent of all owners (seasonally adjusted), 11 points below the 2012 cycle high of a net 12 percent reached in February, 2012. While sales trends improved, they are still weak when viewed through historical context.

Credit Markets

Has the Fed's strategy of quantitative easing had a positive impact on Small Businesses?

Small business demand for credit remained weak in February, given the weak economy. Only 7 percent of owners surveyed reported that all their credit needs were not met, up 1 point but only 3 points above the record low. Twenty-nine percent reported all credit needs met, and 51 percent explicitly said they did not want a loan. Only two percent of owners reported that financing was their top business problem. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, down 2 points and 1 point shy of the record low of 28 points set in November 2010. A net 7 percent of owners reported that loans are "harder to get" compared to their last attempt (asked of regular borrowers only), unchanged from January, though it is now one in four of those in the market. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8 percent (more owners expect that it will be "harder" to arrange financing than easier), 1 point better than in January.

NFIB Commentary

This month's "Commentary" section includes some observations on our "bifurcated" economy:

The economy is clearly bifurcated, with S&P profits at record levels while GDP posts a growth rate of 0.1 percent (excluding government, growth would have been over 1 percent, still a lousy reading). The small business half of the economy is clearly languishing based on NFIB surveys of its 350,000 member firms. So, the average growth of these two sectors is the growth of the private economy (government excluded) and that's not good. With some evidence that the large firms will not perform as well this year as last, prospects for strong growth this year are not good. Housing and energy will be bright spots for job creation, but can't carry the whole burden of restoring employment to its 2007 level.

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.

With the latest NFIB data, we continue to see that the mood of small businesses is highly correlated with Consumer Confidence.