Small Business Sentiment Falls For 5th Straight Month

Small Business Sentiment - Major Decline In Small Business Optimism

The January small business optimism report wasn’t great. Going from great to good is terrible in rate of change terms. 

As you can see from the chart below, the index fell from 104.4 to 101.2. That missed estimates for 103 and the low end of the consensus range which was 102. This index has fallen 5 straight months which is the first time that happened since 1998. 

It wouldn’t be terrible if we were in 1998 as the stock market didn’t peak until 2000. At this point in the cycle, investors are anticipating a recession so much that one more year without a recession would be a big deal. 

It’s important to recognize that it’s irrelevant that this cycle is almost 10 years old.  Important points are consumers aren’t leveraged, and the global economy is slowing. But America outperformed, and sentiment weakened in December and January. This was due to temporary issues like the volatile stock market and government shutdown.

The 3.2 point drop in January was the largest drop since July 2015. This index is at its lowest point since December 2016. 

As many bears like to point out, most of the post-2016 election gains have been wiped away. I’m not surprised that small business sentiment weakened. 

There was a government shutdown, a trade battle with China, stocks fell 20%, and banks slightly tightened lending standards. The consumer is still in solid shape, but small businesses probably figured a recession was possible this year with all the negativity.

Small Business Sentiment - Pessimistic Economic Expectations Drive Index Lower

Just like consumer sentiment, this index fell because of worries about the future of the economy. 

Personally, I don’t care about the economic analysis of consumers or small businesses because they don’t spend time researching it like I do. If they did spend the time, they wouldn’t be very optimistic right before recessions. 

Now they are getting more pessimistic for incorrect reasons. 

The list below shows the components of the index. As you can see, 7 out of 10 components were down. Only a net 6% think the economy will improve. Plans to increase inventories and expectations for real sales to increase fell 7%. Plans to increase inventories were down to a net 1%. A net 15% of small firms expect real sales to be higher.

Plans to make capital outlays were up 1% to a net 26%. 

Small Business Sentiment - Firms are seeing their own business improve, but are worried about the economy

Firms usually respond to trends they see rather than the economy. That’s because if the opportunity to make a profit is available, they will take it instead of relying on their macro outlook. They basically are admitting they can’t predict where the economy is headed. That’s smart because they have businesses to run and don’t have time to read about the entire economy.

Expected credit conditions strengthened 1% to a net -5%. It’s good to see that improvement because the NY Fed senior loan survey suggested lending standards for businesses were tightened slightly. 

Small businesses also had a 2 point increase in earnings trends to -5%. Once again, if the economy was actually plummeting into a recession, earnings trends would be falling as quickly as the expectations for the economy.

Small Business Sentiment - JOLTS Report Beats Expectations

The November JOLTS report missed estimates. But I stated that it wasn’t something to worry about. I was correct because the November JOLTS report was revised to show 7.116 million job openings instead of 6.888 million. That’s a big positive revision. 

As you can see from the chart below, the December report showed there were 7.335 million job openings which beat estimates for only 6.9 million. The biggest criticism of this report is that the huge amount of job openings doesn’t mean there as many new hirings. 

However, it’s not as if workers weren’t hired in December as there were 222,000 jobs created. In January 304,000 jobs were created, so I expect another great JOLTS report.  

Job openings were up 3.1% and hirings were up 1.6% to 5.907 million. I would only call out openings as a complete farce if hiring was falling. The gap between hiring and openings was 1.428 million which is a new record; it increased from 1.304 million. The gap between openings and those looking for work was 1.041 million which is the 2nd highest ever. 

A record was in November as it was 1.098 million. It’s clear the labor market is strong because of the high number of openings and hirings and the low number of people looking for work. 

However, the gap between openings and those looking for work doesn’t mean the labor market is completely full. 

Small Business Sentiment - Clearly some firms with openings have no intention of acquiring new workers. 

Openings were up 29.4% year over year and hirings were up 7.1%.

Number of layoffs and discharges fell 3.2% to 1.697 million. It’s possible employers aren’t firing their workers because they know they can’t find replacements. Number of employees who quit was up 1% to 3.482 million. 

The labor market is strong so workers are quitting their jobs to find new ones that pay more and offer more opportunities. Year over year quits were up 4.3%; layoffs and discharges fell 2.5% year over year.

Small Business Sentiment - Another Weak MBA Applications Report

I need to rethink my optimism on the housing market because the rebound in early January has reversed. The MBA applications index fell 3.7% week over week in the week of February 8th. That’s on top of a 2.5% decline. 

The index has been down 4 straight weeks. Purchase index fell 6% after falling 5%. Refinance index was down 0.1% after increasing 0.3%. Purchase index was down 6% year over year.

This report stated there was a “renewed uncertainty about (the) domestic and global economy.” MBA expects activity to pick up in the next few months. 

Low price appreciation should help purchase applications once consumer confidence rebounds following the government shutdown and the cooling off of the trade war. The 30 year fixed mortgage interest rate fell 4 basis points to 4.69%. 

Rates shouldn’t rebound soon because of low inflation. That’s great for the housing market.

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