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NFIB Small Business Optimism Index fell 1.8 points to 92.3
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Six monthly gains in the Index of Small Business Optimism were reversed in March, as the index fell almost 2 points to 92.5. Nine of the ten Index components declined, only increasing satisfaction with inventory stocks added one point to the Index computation. It looks like a replay of 2011, a few months look good early on and then it all fades.
The March survey results were bad news, ending what promised to be steady, albeit glacially slow, improvements in the small business sector of the economy. Nothing much happened in March to make owners more optimistic about the future and that seems to be a problem, the status quo. Europe was quiet but somber, uneasy, as if waiting for another shoe to drop. Consumer confidence and spending remains depressed. And health care is in the Supreme Court creating more uncertainty, either way the decision goes.
Inflation pressures are building and reports of rising worker compensation are the highest since 2008. The percent of owners reporting “inflation” (rising costs for inputs) as the #1 business problem are the second most frequent since 2008, the highest since 2008 occurred a few months earlier in 2011. Reports of increases in average selling prices are rising and net 21 percent of the owners plan to raise their selling prices in the coming months.
The March employment numbers were a bit of a surprise and a disappointment. On the establishment survey, one might hypothesize that we hired in January and February a lot of the workers we would have hired in March as the weather improved. This means that we added seasonal adjustments to January and February numbers that were not as low as they usually would be with bad winter weather. So, they looked good. Then March hiring was low because a substantial share of it was done in the prior two months, and the seasonal adjustment couldn’t overcome the advance hiring. In short, the current employment stats are not seasonally typical so the seasonal adjustments mislead us. The pattern of losses in retailing is a puzzle, especially since retail sales growth has been positive, confirmed by the rise in the net percent of owners reporting improving sales trends. This raises a second inconsistency, if employment is doing so well, where is the Gross Domestic Product (GDP) that they are producing? Construction and manufacturing employment are behaving as expected. We make more GDP today than at the peak of the expansion in dollar terms, but there are a million housing starts missing in GDP, replaced by manufacturing output (lots of that being exported). Thus, we are using seven million fewer workers since construction is labor intensive and manufacturing is not.
The NFIB models based on the percent of owners reporting “poor sales” as their top business and on the percent with hard-to-fill job openings and job creation plans have tracked the unemployment rate quite well. If March data were to be the same as the April survey, the forecast would add half a point to the unemployment rate for Q2.
The Federal Reserve has become more active in the media, trying to be more “transparent” about policy but adding little clarity. The basic message is that rates will remain low as long as the economy is weak but no one knows at what point the economy will be deemed strong again by policymakers – creating more uncertainty.
Posted: April 10, 2012 Tuesday 07:30 AM