Guest Post: NFIB: "No Sign Of A Surge In Confidence"
Submitted by Lance Roberts of Street Talk Live,
The latest release of the National Federation of Independent Business Small Business Survey was a bit of dichotomy of interpretation. Econoday stated the following:
Optimism is up among small business owners based on a solid 1.9 point gain in the small business optimism index to 90.8 in February. Inventory building, which is often a sign of optimism, leads February's gain followed by plans to increase capital outlays which is another sign of optimism. Gains are wide across components and also include a rise in current job openings. Despite the month's strengths, the report notes that the index level remains in recessionary ground.
However, while Econoday's economists interpreted the report as primarily optimistic, the NFIB's Chief Economist Bill Dunkleberg had this to say:
"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."
These are obviously two diametrically opposed views about the same data. Is the inventory increase really a sign of optimism or is it an unwanted buildup as sales have slowed as shown by the latest wholsesale inventory report? Are capital outlays really a sign of optimism or is it simply just required maintenance and upkeep? The interpretation of the data is key to understanding the direction of the overall economy. As we stated in yesterday's report on employment:
"As we have stated, so very many times previously, the problem with long at individual data points is that you effectively miss the 'forest for the trees.' While the mainstream media focuses on one 'tree' to the next, and tries to extrapolate minor improvements indefinitely into the future, for investors it is more important to remain focused on the 'forest.' The overall trends of the data currently paint a very different picture than what we read in the headlines."
Let's take a look at some of the details. While, as Econoday noted above, the optimism index increased by 1.9 points in February to 90.8 - the index remains on par with the 2008 average and below the trough of the 1991-92 AND 2001-02 recessions. This is shown in the chart below.
While February's change was positive there was little indication of a boost to confidence among small-business owners. The expectations of small businesses for improvement in the economy six months in the future range in at a -28 which is only slightly above its historic low of 35 set in November of 2012. Economic confidence still remains at levels lower than in 2011 or in 2008 during the depths of the financial crisis. The chart below shows economic expectations overlaid with both capital expenditure and employments plans over the next six months.
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. This also somewhat explains the recent declines in hiring plans which corresponds very closely with the peak in employment as reported by the Bureau of Labor Statistics.
Concerns for businesses remain weighted toward the consumer and the government. Weak sales, government regulations and taxes are the top 3 biggest headwinds curtailing small business currently. With the upcoming debates over the debt ceiling and the budget it is unlikely that these concerns are going to improve much anytime soon. This bit of commentary from the NFIB well defines the problem:
"The President has crisscrossed the country telling us how many people will be hurt if he has to deprive them of his largess if spending is cut. And he has chosen cuts that will maximize the pain felt by the citizens, refusing the opportunity to actually lead and manage the cuts more sensibly. But he has nothing to say about the pain he inflicts on the producers of jobs that could help those who are unemployed and want to work. That pain is obvious on Main Street, most recently in the reports of the Regional Federal Reserve Banks. His programs are damaging the economy and creating more dependents on his largess while financed by those who make the economy run. He is clearly not in the mood to compromise much even though consumers are not happy with policy. It is not likely that higher taxes and higher energy costs will make them happy. Only 15 percent of consumers in the University of Michigan/Reuters February poll thought government is doing a "good" job, 43 percent a "poor" job. Seventy-six percent of NFIB owners think that business conditions will be the same (ugh!) or worse in six months - not a pretty picture.
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.
But until owners' forecast for the economy improves substantially, there will not be much of a boost to hiring and spending from the small business half of the economy"
In the end it really isn't important whether, or not, you look at the data as optimistic. What is important is positioning your portfolio for what you believe is most likely going to be occur in the near future. As an investor this is the game you play - betting capital on what you believe will be the most likely outcome in the future. If you are right you win - if not, the lesson can be devastating to your long term investment goals.
There is one rule to remember - being overly pessimistic may cost you a short term gain but being overly optimistic may cost you a long term loss of capital.