Research >> Economics
NFIB Small Business Optimism Index gained 1.4 points to 96.6
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The Index of Small Business Optimism posted another gain in May, the third month in a row. The improvement is certainly good news even though the current reading of 96.6 (up 1.4 points) is still “below average” and far from what is considered to be an expansion level. The four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May. So the entire gain in optimism was driven by soft components (sales expectations and business conditions). If these translate into more spending and hiring, growth will get a boost. However, this “optimism” has not translated into more debt financed spending.
The Index continued to improve, to the highest level since September 2007. That’s the good news. Three gains in a row – could be the start of a trend, although we have had quite a few of these along the way that didn’t pan out. Not so good is that virtually all of the gain came in expectations for sales and for business conditions, the real spending/hiring components collectively lost 1 point. Still, expectations lead actual decisions, and the gains were large. And the employment measures held ground, so something is going somewhat well. Sales and profit trends are the best seen in years and that is an important motivator for hiring, which strengthened, and capital spending, which unfortunately remained uninspired by the expectations gains. Price hikes are becoming less “tame” but not a real inflation threat yet, and owners, although feeling better about sales prospects and business conditions, are still not willing to borrow and spend. Loan demand remains historically weak and few complain about credit availability or cost.
The “bifurcation” continues, with the S&P 500 hitting new record highs while the output of the firms being valued (GDP) fell 1 percent at an annual rate in the first quarter and the second quarter seems off to a weak start. Profit performance was not great (down 34 percent at an annual rate, down 4 percent year over year) but this did not deter investors who were further enticed to buy equities by a bond market rally. Although the Federal Reserve has declared that we are wealthier than at any time in history, it doesn’t feel that way. All that wealth isn’t producing much consumer spending. Consumption is estimated to rise 2 cents for every dollar increase in stock market wealth and 10 cents for every dollar in housing wealth, thought to be more permanent, at least until the housing bubble burst. And it is hard to believe that after the housing bubble and the worst recession since the Depression, that we could be so wealthy so quickly. Perhaps the values we are attaching to the assets we all own are not realistic (viz. the Fed’s distortion of a very important price, interest rates).
Chairman Yellen has promised to keep rates low and provide substantial accommodation. Although it is not clear that buying a trillion dollars of bonds really helps the real economy much, just big banks and traders. So, the stock and bond markets get continued artificial support and consumers lose “normal” interest income - and the Fed’s portfolio grows.
Posted: June 10, 2014 Tuesday 07:30 AM