Anomaly In March NFIB Report

by Lance Roberts

As regular readers of this site already know, I regularly analyze the data provided by the National Federation Of Independent Business monthly survey. As a small business owner, this data is crucial to digest and understand as it provides a real pulse of what is happening at "my" level as compared to what is provided through government agencies. This report, in particular, is why I have held a long standing position that the recovery on Wall Street is far different from what is actually happening on "Main Street." This month's analysis is coming from a different angle as I think there may be a potential anomaly in the survey data. During my September, 2013 review (for the August data) I noted that: "One of those incongruences in particular was in job creation plans the jumped to a level not seen since before the last recession.  However, that increase is not supported by the dramatic deterioration in real sales. The favorable employment plans also contrasted sharply with the increasingly negative expectations of future business conditions.  While there had been some recent improvement in recent months from historically low levels at the end of 2012 - outlooks remain at very recessionary levels." That inconsistency was corrected by the NFIB in the next month. "Well, a processing error produced a few 'interesting' results in the details in the August data such as a surge in job creation plans and major declines in reported sales." The reason that I bring this up is because I see a similar divergence of the data in the latest NFIB survey for March. Overall the optimism index rose by 2 full points from 91.4 in February to 93.4 currently. Unfortunately, that is still below the January level of 94.1. The chart below shows the history of the NFIB survey to put the current reading into perspective.  The survey remains at levels that historically been consistent with the troughs of recessions, not entering into the sixth year of recovery. Some of this increase in optimism could certainly be attributed to a "thawing" of attitudes following the repeated blast of freezing temperatures, and inclement weather, during the first quarter of the year. However, if we dig down into the data, we find something very interesting. Out of the 10 small business optimism components most were modestly unchanged moving within a couple of points from last months print.  However, the big standout was the nine (9) point leap in the expectation of higher real sales. The reason that I suspect that this jump in sales expectations could be an anomalous reading is the reading was not confirmed by things that should be associated with such an increase. As a small business owner, I am very sensitive to my customer demand as that is the basis from which the majority of operational decisions are made. If current customer demand is strong, and growing, I would consider increases in productivity, employment, facilities, inventories, etc. This is particularly the case if I am expecting substantial increases in sales activity in the next quarter as if I am unable to satisfy demand, I will lose that business to my competitors. However, therein lies the problem with the sharp increase in sales expectations in March as shown below: Plans to make capital outlays declined by 1 in March to 24%. Plans to increase employment declined by 2 to 5%. Satisfaction with current inventory increased by 4 to 0% Current job openings remained unchanged at 22% Expectations of economic improvement increased only by 1, and remains deeply depressed at -18. Actual sales rose only by 2 to -6 which is where they were in August of 2013. Plans to increase compensation remain unchanged at 14. You would expect that if businesses were planning for a relatively sharp uptick in real sales in the months ahead, that they would be making changes to accommodate the increased demand. Yet, the data suggests that business owners may just be "hoping" that sales will increase, but not willing to "bet" their capital on it. This is because, despite hopes of increasing sales, business owners simply do not believe that that this is a "good time to expand" their operations. That view has remained unchanged since the depths of the financial crisis. For small businesses, the overall environment remains very challenging. The top 3 concerns of small businesses remain government regulations, taxes and poor sales as shown by the composite indicator below. While improved somewhat from the financial crisis, levels remain well entrenched in recessionary territory. Increased regulations, the onset of the Affordable Care Act (ACA), increased taxes (due to the ACA) and increased costs of compliance keep budgets tight with profitability a primary focus. This is also why the expectations of economic improvement over the next six months remains at extremely low levels. While the expectation of higher real sales certainly gave a significant boost to this month's survey report, it is likely to be a one-month anomaly unless we see a transition into actual sales. However, Bill Dunkleberg, Chief Economist for the NFIB, summed this up well: “Overall, the March gain more or less reversed the February decline. While the Index still can’t seem to get above 95, we can be encouraged that the economy is at least crawling forward and not heading in reverse. The outlook for real sales gains accounted for about half of the improvement with inventory satisfaction and inventory investment plans accounting for most of the rest. However, throughout this recovery we’ve seen these types of increases only to have them go nowhere. As long as Washington continues to ignore policies that could restore the middle class, job creation will continue to be sub-par.xxx” With the Federal Reserve now extracting their support from the financial markets, real interest rates higher which impacts borrowing costs, and health care insurance premiums set to rise by as much as 40% over the next two years, the headwinds to small business owners are substantial. As I discussed just recently in "Why Surging Profits Aren't Leading To CapEx:" "Currently, there is a majority of analysts, and economists, 'hoping' that businesses will suddenly step to the fore and begin a 'spending rampage' to boost economic growth. Never before has a segment that comprises 17% of GDP been able to pick up the slack for a segment that comprises 68%. It is function of math that will likely lead to eventual disappointment."

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