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NFIB Small Business Optimism Index increased 0.7 points in June to 94.5
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The Index of Small Business Optimism increased 0.7 points to 94.5, still well below the 40 year average of 98, but the third monthly gain in a row, although the gains are very small. Four of the 10 Index components posted a gain, three declined and three were unchanged. The outlook for business conditions six months out continued to improve, although more owners still expect conditions to be worse than expect improvement. First quarter GDP growth was revised up again, to a sluggish 1.1 percent. Second quarter growth will likely be better, in the low 2 percent range. Small business owners appear to be on the same track they have followed for the past few years – maintenance mode, but not much growth. This will keep the economy moving forward, but not at an impressive pace.
Federal Reserve officials had the market all set for a June or July rate hike, then came the employment numbers, stunningly low, and then the BREXIT vote. Now, many observers expect no hike for the rest of this year, maybe even in 2017. One data point and a UK vote, and the entire projected policy path is changed. Not to mention that the data are subject to substantial revisions so who knows where they will land. For example, Q1 GDP growth estimates started at 0.4 percent and ended up at 1.1 percent, almost 3 times larger. Financial markets plunged for two days and then made it up the next two, no surprise with 50 percent on each side of the BREXIT bet. So the policy path remains “data dependent” as if these monthly data points are good guides to longer term growth prospects. For fiscal policy, the expectation remains the same – no new developments, $600 billion will be added to the deficit. State and local government spending will pick up modestly, not much to hang your hat on unfortunately.
Consumer sentiment went down (University of Michigan) or up (Conference Board) depending on the source but the most recent retail sales figures were promising. Consumer spending is critically important to small businesses. Ford doesn’t sell cars, small business owners do. The savings rate in Q2 was half a point lower than in Q1, if that went to spending, it will support GDP growth. The New York Fed’s advance estimates put Q2 growth at 2.1 percent and 2.2 percent for Q3. The Atlanta Fed is at 2.6 percent for Q2. That a big difference in terms of job growth.
The NFIB data indicate no surge in growth coming from the small business sector to support Q3 growth. Capital spending plans are very low in the West South Central states, 18 percent vs 26 percent nationally. Reports of capital spending in the past six months were also conspicuously low, 43 percent vs 57 percent nationally, and this will weigh on growth numbers. Hiring plans were weak as well, a net 11 percent planning to create jobs compared to 18 percent nationally. Faced with the Federal Reserve’s “back-peddling” and BREXIT to add to uncertainty, the prospects for economic growth beyond recent experience are cloudy at best.
Posted: July 12, 2016 Tuesday 07:00 AM