2020: Small Business Disaster

Small Businesses In Trouble

NFIB survey is way too optimistic of a depiction of how small businesses are actually doing. The strength of small businesses is strongly dependent on the industry and state/city the business is in. Let’s look at more Paychex data from November. In Texas and Florida, the indexes are at 96.73 and 96.72. On the weak side, the worst 2 states are New York and Washington which are at 92.35 and 91.59. 

If you are a restaurant in Seattle, you’re barely surviving, while if you are a construction company in Denver, you are doing very well. Denver’s index is at 97.31 and it’s at 97.58 in construction. On the negative side, in Seattle, it’s at 91.29 and it’s at 88.14 for leisure and hospitality.

Bank of America’s survey of small businesses is quite negative. In the survey of 1,000 entrepreneurs from July to September, 39% said their local economy would improve in the next year which is down from 51% before the pandemic. Hiring plans and sales expectations were the lowest since 2012 and 2013. That’s not as bearish as the Paychex data.

7 in 10 small firms plan to keep staffing the same in 2021. Arguably, that’s bad news because we want them to rehire the people they fired in the spring. The top 3 concerns small businesses had were healthcare costs, COVID-19, and politics. The good news is 2 of those 3 will be gone in 2021. The bad news is healthcare costs will probably be an issue for years to come. Over 80% of small businesses stayed open during the pandemic because they were essential or complied with social distancing rules.

This makes the temporary liability shield that McConnell supports important because it limits the lawsuits on small firms who complied with government regulations. It’s uncertain how successful this will be. We can be quite confident there will be a lot of lawsuits once the dust settles on this pandemic. 

COVID-19 caused 24% of small firms to retool operations and 61% to develop new products and services. There were a ton of added costs this year with fewer sales as a reward. Think of all the costs restaurants had to deal with to make it comfortable to eat outside just to get fewer customers as a reward.

Very Strong Markit PMI, While ISM PMI Falls

The Markit manufacturing PMI was extremely strong just like the flash reading implied it would be. The PMI rose from 53.4 to 65.7 in November. The Markit PMI tends to peak lower than the ISM PMI, so they aren’t perfect comparisons. That’s why you can compare them to their own historical readings. This was the best Markit PMI since September 2014. 

Inflation was up the most since October 2018 which is in line with the market’s inflation expectations. The CRB commodity index is up from 145.91 to 159.42 in the past month. The 10 year breakeven inflation rate is 1.85% which is the highest reading since May 2019.

Business confidence is the strongest since February 2015. The Chief Business Economist at Markit stated, “The rise in investment spending sends a welcome signal that companies have become more optimistic about longer term prospects, something that was reinforced by a surge in firms’ expectations about production in the year ahead – even in consumer-facing sectors – to the highest since early-2015.” The upturn in new orders was the highest since May 2018.

As you can see from the chart below, the ISM PMI fell from 59.3 to 57.5 which is the equivalent of 4.3% GDP growth. The Atlanta Fed GDP Nowcast calls for 11.1% growth because of the easy comp. The ISM data doesn’t take comps into account. Unlike the Markit reading, the new orders index fell 2.8 to 65.1. Since it’s above 50, new orders are still increasing; they are just increasing at a slower rate. The production index was down 2.2 points to 60.8.

A furniture and related products firm stated, “Sales have been steady, but down 30 percent year over year. Work hours for production are going up, but still have several on lay-off. Starting to see some inflationary pressure on materials.” This must be a firm that sells furniture to offices and hotels because home furniture has been amazing this year as people have spent more time in their homes due to social distancing rules.

ADP Misses Again!

We have gotten used to ADP being too pessimistic in this expansion as it continues to miss estimates. You would think its difference with the BLS reading would shrink over the next few months as the labor market steadies. In 2021, the economy will probably average creating about 250,000 jobs. There will be less variance next year besides after the first couple months the vaccine allows the economy to reopen.

The ADP report showed there were 307,000 private sector jobs in November which was below the consensus of 420,000 and the lowest estimate of 350,000. This was down from the upwardly revised 404,000 in October. As you can see from the chart above, employment is down 7.5% from before the recession. It troughed at -7.4% in the financial crisis, meaning we have merely gotten back to the start of a recovery after a bad recession.

This was a decent report given the recent rise in initial claims in the past 2 weeks. Within this report, small firms added 110,000 jobs, midsized firms added 139,000 jobs, and large firms added just 58,000 jobs. Large firms dragged the reading down. Goods producing firms added 31,000 jobs, with construction adding 22,000 jobs. Services added 276,000 jobs, with leisure and hospitality adding 95,000 jobs.

This ADP report is much below estimates for the BLS reading. The consensus is 500,000 overall jobs added and 590,000 private sector jobs added. I expect results to come in between these estimates and ADP’s reading. If estimates are actually met, this would signal the labor market is still in ok shape despite the 3rd COVID-19 wave. 

Obviously, this would be a sequential decline in job creation, but it’s impossible to keep having 906,000 private sector jobs added each month. It’s expected that job creation will gradually fall towards 150,000 which is about what’s necessary to keep up with population growth. 

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