NFIB Small Business Optimism Lowest in a Decade
May 9, 2023
NFIB Small Business Optimism Index
Small businesses reported the weakest sentiment for some time this April. The NFIB Small Business Optimism Index fell -1.1 pts to 89.0 in April, the lowest in around 10 years. The current inventory (-6 pts to -5%) and earnings trends (-5 pts to -23%) indexes fell the most, pointing to weak expected sales against small business stocks. Expectations for general business conditions moved to the lowest that they have been so far in 2023, down to the levels seen during the slowdown during the period of elevated inflation at the end of 2022. As conditions continue to worsen, small businesses continue to pull back from capital spending. Only 19% of small business owners plan to make capital outlays in the next few months which is down -1 pt from March and historically low. The lagging effects of rate hikes and tightening are finally having an impact on small businesses. Even though the index is already at its lowest point in a decade, we should expect further declines in small business owners’ perceived conditions. This is, after all, the intended effect of tightening by the Federal Reserve.
That intention is to ease inflationary pressures which has been the driver of monetary policy for the last year. The NFIB survey tracks two significant signals of pricing behavior, and both fell today. The Actual Price Changes index fell -4 pts to a net 33%, the lowest since March 2021, and the Price Plans index fell -5 pts to a net 21%, the lowest since November 2020. For context, the former index, tracking current price changes, averaged about 13 in 2019, and the latter index, tracking future price changes, averaged about 21 in 2019. So at this point, it appears that businesses continue to plan to reduce prices at a historically normal rate, but there are still some unplanned price pressures keeping current prices rising. That likely comes from issues with labor shortages which are now the top problem for small businesses (24% of owners responded with this vs 23% responding with inflation). A net 40% reported raising compensation, and a net 21% plan to raise compensation in the next three months. This trend with actual wage growth topping planned wage growth is consistent with what we see in the price indexes.
Small businesses are facing tough times in the current economic climate. Sales and margins are under pressure due to tightening from the Federal Reserve, and the economy continues to decline. Although disinflation is occurring, price pressures persist as a result of excessive wage growth, driven by labor shortages. As a result, we should expect the Fed to maintain the current level of tightening for the rest of the year. Rate cuts seem to be a distant reality. Small businesses will need to continue navigating these challenging circumstances, but there is hope that the situation will improve in the coming months as the labor market stabilizes and price pressures ease.
Still to come…
N/A
Morning Reading List
Other Data Releases Today
Real household spending in Japan fell -1.9% YoY in March, down from a 1.6% YoY gain in February. Spending on goods declined -2.2% YoY (prev 1.3% YoY), and spending on services was up 3.4% YoY (prev 4.5% YoY). Real incomes were down -4.5% YoY (prev -0.8% YoY).
The UK Halifax House Price Index fell -0.3% MoM in April after an 0.8% MoM rise in March. The annual rate of house price growth is now just 0.1% YoY, down from 1.6% YoY previously.
China Trade
China’s contracting imports poses a challenge for future exports (ING) - Chinese exports grew by 8.5% year-on-year in April, but imports contracted by 7.9%YoY in the same month, and this contraction has deepened. The deterioration of the global economy could weigh further on China's economy as the year progresses.
US
Fed Policy: Sufficiently Restrictive (Maybe) (BMO) - The FOMC changed its forward guidance last week, indicating that it will probably pause rate hikes at the next meeting (June 14). The policy statement said: “In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.
Banks intensify the squeeze on US growth prospects (ING) - The Federal Reserve reports that banks are becoming increasingly restrictive in terms of their lending behaviour, compounding the recessionary risks coming from rapidly higher borrowing costs. The data suggests a sharp slowdown in lending growth is coming with upside risks to unemployment.
Bank Problems Aren’t Over, But It’s Not 2008 (First Trust Portfolios) - Yes, we have banking problems. No, this is not 2008. It’s much more like the 1970s Savings & Loan problems. In other words, we do not have credit problems today, we have duration (asset-liability) problems. These are exacerbated by the fact that
Quantitative Easing inflated total deposits in the banking system.
Tighter financial conditions needed (S&P Global) - Last week's report on April employment underscored recent trends in the broad flow of data on the economy: The economy is growing at a gradually slowing pace; labor markets remain unsustainably tight; inflation is falling way too slowly. Bottom line: The Federal Reserve may have still more work to do if things don't change pretty quickly.
The Rise and Fall of Pandemic Excess Savings (San Francisco Fed) - U.S. households built up savings at unprecedented rates following the strong fiscal response and lower consumer spending related to the pandemic. Despite recent rapid drawdowns of those funds, estimates suggest a substantial stock of excess savings remains in the aggregate economy. Since 2020, households across all income levels have held a historically large share of savings in cash or other easily accessible forms. Estimates suggest that those funds could be available to support
personal spending at least into the fourth quarter of 2023.
Finger on the Pause Button (BMO) - Equity markets endured the FOMC announcement, some key economic data, debt ceiling concerns and ongoing trouble in the U.S. regional bank sector—just another week in the office. The S&P 500 ultimately finished down a modest 0.8%, but not without some meaningful swings.
Consumer Credit Growth Slows in Q1 2023 (NAHB) - According to the Federal Reserve’s latest G.19 Consumer Credit report, the growth of total consumer credit outstanding slowed from 7.4% to 5.4% (seasonally adjusted annual rate) in the first quarter of 2023. Nonrevolving (excluding real estate debt) and revolving debt grew 3.1% and 12.3%, respectively, over the quarter.
Tightening the Credit Taps (BMO) - U.S. bank senior loan officers reported generally tighter lending conditions in the past three months and intend to restrict credit further this year amid fallout from the recent stress in the banking system and concerns about a possible recession.
If We Could Read Jay’s Mind… (BMO) - Markets took a step back this week amid a renewed flare-up in regional bank selling and a dramatic tightening in the timeline for the debt ceiling. These twin ghosts overshadowed the two heavyweight economic developments of the FOMC decision and the April jobs report.
Debt Ceiling: X Marks the Spot (BMO) - As if investors don’t have enough to worry about amid stubborn inflation, recession fears and renewed bank stress, now Congress’ regularly scheduled crisis—the debt ceiling—could erupt sooner than previously thought, which hitherto was late summer.
Are There Too Many Ways to Clear and Settle Secured Financing Transactions? (Liberty Street Economics, NY Fed) - The New York Fed’s Treasury Market Practices Group (TMPG) recently released a consultative white paper on clearing and settlement processes for secured financing trades (SFT) involving U.S. Treasury securities. The paper describes the many ways that Treasury SFTs are cleared and settled— information that may not be readily available to all market participants. It also identifies potential risk and resiliency issues, and so promotes discussion about whether current practices have room for improvement.
Europe
The Chinese challenge to the European automotive industry (Allianz) - The shift to battery electric vehicles is a game changer for the European automotive industry. Alternative energy vehicle sales reached a record-breaking 4.4mn units in 2022, representing 47% of all new vehicle registrations in Europe. Battery electric vehicles (BEVs) led the way, with sales booming by +28%, representing 12% of all new vehicle registrations. With the 2035 phase-out of internal combustion engines (ICE) looming, the automotive sector is on the cusp of a complete shake up, facing a transformation of its supplier base, changing customer needs, competition from new entrants and the reality of a less car-centric society.
Australia
NAB Monthly Data Insights: April 2023 (NAB) - Consumer spending, according to NAB’s transaction data, declined in April after showing a fall in March. The decline was driven by services spending categories, including hospitality, construction, and arts, recreation & travel.
AMW – How sticky will Australian inflation be? (NAB) - Consistent with growing concern by the RBA about sticky inflation, this Australian sticky inflation measure has been “stuck” at a 6% annualised rate in the past three quarters. And with rent rises, wage rises, and energy price rises suggesting little near term relief, that is likely to remain a concern for the RBA going forward, suggesting the risk of further tightening being required.
Emerging Markets
Emerging Market Sovereign Debt Dynamics Are Worsening (Wells Fargo) - While emerging currencies have performed well overall so far this year, in our view underlying vulnerabilities across the emerging world are building, particularly in the sovereign debt space. Following a few years of somewhat stable debt-to-GDP ratios, the IMF now forecasts sovereign debt burdens across the emerging markets to start rising at a quicker pace, with the debt burden for emerging markets in particular moving in a more worrisome direction.
Inflation
Will Wages Be the New Inflation Driver? (BMO) - To Chair Powell’s point, wages did not cause the inflation surge of the past two years. Full stop. But the concern is that wage increases may now more fully echo the big run-up in prices, further entrenching the current inflation episode.
Inflation Monitor for May 8 (BMO) - U.S. and Canadian hiring picked up in April, while wage growth stayed elevated, underscoring that a robust labour market could sustain inflationary pressures despite an economic slowdown.
Where Might Inflation Head? (St Louis Fed) - In my previous post, I outlined why the current episode of high inflation has been persistent and widespread. In this post, I examine the impact of fiscal and monetary policies during this episode and provide a plausible outlook for the near future.
Monetary Policy
Rate Hikes Under the Light of a Thousand Stars (BMO) - The goal is the same (get inflation back to 2%); but, the plan on how to get there is different.
PMI
Global manufacturing PMI stable below neutral mark in April (ABN AMRO) - Global manufacturing PMI stable at 49.6 in April. Weakness still dominated by the demand side. Delivery times point to cyclical weakness, while industrial price pressures evaporate.
World
Global | WHO: The end of the international emergency for COVID-19 came after 1,192 days (BBVA) - After 1,192 days of Public Health Emergency of International Importance (PHEIC) due to COVID 19, on May 5, 2023, the World Health Organization (WHO) reports that it no longer constitutes an international emergency and concludes the PHEIC, but the pandemic continues.
Outlook
Major forecasts: Premature peak predictions (Nordea) - Recent central bank communication illustrates that peak benchmark rates are getting closer or may already have been reached. We continue to see further hikes at least from the ECB, and think financial markets are pricing in too many rate cuts ahead.
Research
Incorporating Short Data into Large Mixed-Frequency VARs for Regional Nowcasting (Cleveland Fed) - Interest in regional economic issues coupled with advances in administrative data is driving the creation of new regional economic data. Many of these data series could be useful for nowcasting regional economic activity, but they suffer from a short (albeit constantly expanding) time series which makes incorporating them into nowcasting models problematic. Regional nowcasting is already challenging because the release delay on regional data tends to be greater than that at the national level, and "short" data imply a "ragged edge" at both the beginning and the end of regional data sets, which adds a further complication.
Are Capital Expenditures Getting Too Expensive? (Richmond Fed) - Capital expenditure (CapEx) is business spending used to acquire, improve, and maintain physical assets, such as buildings and machinery. These projects often require extensive planning because once in motion, they tend to be expensive, drawn out, and costly to stop. As such, a firm's willingness to undertake capital expenditures can be indicative of its future economic outlook. For example, a retail business may be less likely to invest in opening a new storefront if it's pessimistic about future demand for its product. In our monthly Fifth District surveys, we regularly ask firms if they have made changes to their current and expected capital expenditures. Additionally, as part of the Q1 2023 CFO Survey, we asked firms about their capital expenditures expectations. We find evidence that firms are slowing their pace of capital investment; in our monthly business surveys, the share of firms reporting month-over-month increases in capital expenditures has been trending downward since April 2022.
Where Do the Wealthiest Get Their Wealth? (St Louis Fed) - An analysis of panel data from Norway suggests that, on average, the wealthiest 0.1% of households are already rich in their 20s, invest heavily in equity, and save much of their income.
Global Profit Shifting through Intellectual Property and the Impact of US Tax Reforms (St Louis Fed) - Globalization has allowed multinational enterprises (MNEs) to expand their operations to reach new markets across the globe. However, one drawback of globalization is that MNEs can easily shift their profits to lower-tax countries.
Subscribe to receive Econ Mornings every weekday at 9 am. More economic and finance content on Twitter, Reddit, and my website.