Small Businesses Optimism Fell In September

Powell At 52%

The latest update on the Fed chair odds is Warsh is at 30% and Powell is at 52%. Clearly, the decision is coming soon as the odds that anyone outside the top two are picked are falling. The higher Powell’s odds go, the more bullish it is for stocks. I wouldn’t say the reason stocks were up on Tuesday was because of this improvement for Powell, but it doesn’t hurt. If Powell is picked, there might be a one day small positive reaction. It’s more about avoiding the correction which would occur if Warsh was picked, then looking for a bounce in the market. Since Powell is a status quo pick, you’d expect his appointment wouldn’t move markets as much. The only way it would move markets would be if Warsh was the front runner before the announcement.

Small Businesses Are Less Confident

This year, the NFIB small business confidence index has been a strong point in the sea of economic data. For the first time this year, the index had a decent decline. The index fell 2.3 points to 103 in September. That’s the largest decline since October 2013. The overall metric is still near the peak, but it’s heading on the path of ‘great to good.’ The chart below gives a breakdown of each of the segments in the survey. The index which showed the biggest change from August was the expectations for real sales to be higher. It fell from 27% to 15%, meaning 15% more businesses expected sales to be better than the percentage who expected sales to be worse. Expectations are a leading indicator, so any weakness is disconcerting for the rest of the year. The other big weak point was whether now is a good time to expand. The net result in that question was -10% showing how the environment for small businesses weakened sharply.

The obvious question is how much this data was impacted by the hurricanes. The small businesses were more effected by the weather than large ones. However, the NFIB is saying the weakness from the hurricanes didn’t cause this negativity because there was a drop in sales expectations across the country. According to Juanita Duggan, NFIB President and CEO, “the temptation is to blame the decline on the hurricanes in Texas and Florida, but that is not consistent with our data. Small business owners across the country were measurably less enthusiastic last month.” This is disconcerting as small business drive the labor market. I always knew the peak levels of optimism weren’t sustainable. This could be the start of a trend downwards. This negative trend would be consistent with what the ECRI leading indicators report has been showing for the past few weeks.

According to the NFIB chief economist, the adjusted employment change per firm fell -0.17. The chart below shows this is one of the worst reports since the 2008 recession. This is consistent with the weakness seen in the ADP private sector employment report and the BLS employment report. The inconsistency is that we’ve been told this weakness in the labor reports I cited was caused by the hurricanes. The only way to tell the cause of the weakness is to look at the ADP report on small businesses in October.

As of now, the jury is out on what caused the weakness in the jobs growth from small businesses. Even though the NFIB CEO said this wasn’t caused by the hurricanes, I think that’s slightly incorrect. She should have said this weakness wasn’t exclusively caused by the hurricanes. There’s no way they helped the situation. We saw the jobless claims spike after the storms in Texas, Florida, and Georgia. Later in the report, it says there was weakness in 6 of 9 regions saying it wasn’t just caused by the hurricanes, but that doesn’t tell us the individual results. I’d expect to see the regions which include Florida and Texas to be the worst. Essentially, the hurricanes exacerbated a report that would have shown moderate weakness.

The other labor market measurements in this report are the questions if small businesses are planning to hire and if small businesses can hire enough workers. The plan to hire index increased one point to 19%. That’s the highest since the period before the last recession. As you can tell, this index is the opposite of the index shown in the chart above. This inconsistency is probably caused by the weather. It’s also possibly caused by the fact that finding qualified workers is difficult. 19% of firms said finding qualified workers is difficult, making it the second biggest problem small businesses face. 30% of businesses had job openings they couldn’t fill. That is down 1% from last month. It’s been hovering between 30% and 35% in the past few months.

The only specific detail mentioned in the report about Florida and Texas was that the response rate was the same. That tells us the data was accurate, but it doesn’t say what those states said. Obviously, nothing positive can be said after devastation. On the bright side, in the next few months there will be an increase in capital outlays.

A final interesting tidbit from the report was that it says the news about tax reform came out too late to have an effect on expectations. I find that statement off because there hasn’t been any news on the tax reform from. It’s being discussed more, but nothing has been voted on yet. I wouldn’t be surprised if this ‘news’ doesn’t affect the October survey either. According to PredictIt, there’s a 21% chance the corporate tax rate will be cut by the end of 2017. The report attempts to be objective, but I find that analysis that tax reform discussions would have made small businesses more optimistic to be a reach. There’s no doubt tax cuts will help small businesses. The problem is there’s no hard evidence that the tax cuts will be passed by the end of the year.

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