US Small Business Survey: One Data Source, Two Contrasting Sentiments

Former US President John F. Kennedy once asked two of his officials on the conflicting reports they issued on the political conditions of South Vietnam, “Did you two gentlemen visit the same country”?

The US National Federation of Independent Data (NFIB) recently released its small business survey.

The bullish view, from Dr. Ed Yardeni: (italics original)

The members of the FOMC might feel even better about the labor market and the economy if they look at December’s NFIB Small Business survey. Consider the following:

(1) More hiring and job openings. The survey shows that the outlook for the labor market is improving. The monthly data are very volatile, so I smooth them with 12-month averages. They show that the percent of firms expecting to increase employment rose to 6.3% in December. That may not seem like much, but it is the highest reading since October 2008.

Even more encouraging is that the percentage of firms with one or more job openings rose to 23%, the highest since January 2008. That’s up from the most recent cyclical low of 9% during November 2010.

(2) More capital-spending plans. Another upbeat reading from the survey is that 24% of firms have capital-spending plans over the next three to six months, the highest level since November 2008. Those capital-spending plans are highly correlated with the percent of firms reporting that earnings were higher minus those reporting that they were lower over the past three months. The up/down balance of earnings has recently rebounded back close to the June 2012 cyclical high, and is consistent with more upside to capital-spending plans by small businesses.

(3) Better sales, but too much government. From October 2008 through July 2012, the #1 problem reported by small business owners was poor sales. The percent reporting this as their #1 problem fell to 16.2% in December (based on the six-month average), the lowest reading since July 2008. Now the #1 problem according to the NFIB survey is government regulation (21.7%), followed by taxes (20.7%). In other words, the economy is improving for small businesses, but Big Government is a drag for them.

The uncertain view, from the source: the National Federation of Independent Business (bold mine)

Small-business optimism ended the year slightly up from November at 93.9, but below the previous 3 mid-year readings of over 94 and 6 points below the pre-recession average, according to the National Federation of Independent Business’ (NFIB’s) latest index. On the positive front, reports of capital spending rose significantly in December, increasing by 9 points from November and job creation among NFIB firms was the best since February 2006. Hopefully, the promising NFIB job creation and capital spending numbers for December forecast a better 2014.

“While there has been no sign that a real recovery has begun, we can be encouraged that the economy is at least crawling forward and not heading in reverse,” said NFIB chief economist Bill Dunkelberg. “Some segments of the economy are showing improvement (manufacturing, construction, professional services), but consumer spending, especially on services (70 percent of consumption), has lagged. Spending on items such as automobiles has certainly increased, however a corresponding rise in hiring has not yet materialized.

“Two monthly advances could be the start of a more positive trend, but there are many threats to improvement, including the majority of respondents feeling the current climate is not “a good time to expand substantially” blaming the political climate, something that may not improve in an election year. Obamacare will continue to generate issues for small business owners as well as individual consumers. And the national debt continues to rise with another fight to increase the debt ceiling looming once again. The uncertainty that has contributed to our slow recovery is clearly still present – making any advances shaky at best.”

What you see depends on where you stand.

 

It's also a wonder how current valuations of the small cap Russell 2000 at 87.65 as of Friday's closing prices is justified given the above, whether optimistic or uncertain