Research >> Economics

NFIB Small Business Optimism Index slipped to 90.9


The Index of Small Business Optimism fell 0.3 points in May to 90.9. This month marks the third monthly decline in a row. The proximate cause is the fact that 1 in 4 owners still reports weak sales as their top business problem. Consumer spending is weak, especially for “services” a sector dominated by small businesses. Also, inflation is a growing concern now with 1 in 10 citing this as their most serious business problem meaning cost side pressures coming in the “back door”, not rising food prices at home.

The May survey indicated that there was very little job creation on Main Street in May and that the unemployment rate would rise and, unfortunately, this turned out to be the case. McDonald’s one time hiring binge is much appreciated, but is not a repeatable event. Taking the retail anomaly out, private job creation was clearly weaker in April and this was confirmed in May. The Administration has offered tax breaks for hiring and equipment investment with few results. Failing to understand the reasons small business owners are not hiring or investing has resulted in a set of policies that have not been very effective. Low interest rates are not an inducement to buy capital equipment that is not needed. Remember, there was much hiring and expansion based on spending by consumers who did not save. Now there is “excess capacity” and it has not yet been rationalized.

It is simple: when sales pick up, owners will have a reason to hire more workers to take care of customers, to produce more output and will have a reason to invest in new equipment and expansion. The proximate cause of the collapse of spending in 2008 was reduced consumer spending. Dealingwith this was not a priority in the “stimulus.” So, one in four owners still reports “weak sales” as their top business problem and surveys of consumers show they are uncertain about the future as are business owners. This is amplified by the heavy debt burdens consumers carry as they try to “restructure” and pay down debt. So the Administration is applying misdirected policies to the problem and does not want to acknowledge that some problems can not be resolved quickly. This requires patience, which few who depend on elections for their jobs possess.

The “feedstock” for inflation continued to grow, with the number of owners actually raising average selling prices reaching a net 15 percent, seasonally adjusted. Thirty-one (31) percent reported raising average selling prices, double the percent cutting prices which suggests that average price levels will be rising, and that is “inflation.” The Federal Reserve protests the notion that QE2 liquidity is driving commodity prices as liquidity scours the world to find a higher return than that offered by banks, but there is a strong correlation between Federal Reserve purchases and commodity prices. Certainly the risk of “too low for too long” is starting to worry some observers. And savers are getting real tired of the low return on their savings.

To many, the world looks like it is falling apart at the seams, with evil “leverage” creating problems everywhere. Everyone can’t live beyond their means, our governments are finally starting to figure that out.




Posted: June 14, 2011 Tuesday 07:30 AM




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