While the NFIB Index, released today, posted its 6th monthly gain at the headline it is still 0.2 points below its level a year ago. In other words, even after six monthly consecutive gains there has been no real progress to speak of. While the economic and survey numbers are improving they continue “improving at a glacial pace” which means they are very susceptible to any external shock that could occur. One interesting note was on employment about an issue that we have repeatedly discussed; “The jobs numbers are looking better, but with such unusual weather, one is never sure just what the seasonal adjustments are doing to the measures.” There have been HUGE adjustments to the data in the last two months. Due to the way that seasonal adjustments work to smooth the raw data over time – small differences as a result of weather impacts can have outsized impacts on the seasonally adjusted data. As we move into the seasonally warmer months ahead this impact will be reversed and we will get a clearer picture of what employment is actually doing.
“Reports of capital spending continued to improve, although the percent of owners characterizing the current period as a good time to expand fell in February and remains historically low. The frequency of reported capital outlays over the past six months rose 2 points to 57 percent, building on the solid gain posted in December. Plans for future expenditures are a little bleaker, however. The percent of owners planning capital outlays in the next three to six months fell 1 point to 23 percent. Eight (8) percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 1 point. The net percent of owners expecting better business conditions in six months was a negative six percent, down 3 points, and 15 percentage points lower than last year’s reading. Not seasonally adjusted, 17 percent expect deterioration (down 1 point), and 21 percent expect improvement (down 1 point).” The real points to pick up here is that expectations about future economic conditions are deteriorating and this will impact employment in the months ahead.
Earnings expectations increased to a -19 and has continued to improve in recent months but “poor sales” as a major concern still ranked near the top of the list and was unchanged from last months read of 22. Furthermore, going back to the employment issue it is aggregate end demand that drives employment. This is where the concern about sales has a very high correlation to employment.
Actual sales changes over the last three months declined from -6 to -7 and is now back to where it was last June. There was also an interesting comment about inventory. “It appears that the adjustment of inventories to lower consumer spending is about done.” This aligns with our recent commentary of the state of the consumer. The question is now, as gasoline and energy prices have risen, if we see upticks in the consumption related parts of the survey such as poor sales, inventories, sales prices, etc.
The conclusion is that while the economy is currently holding onto tenuous gains and moving slowly ahead in fits and starts, look for a decline in GDP in the first quarter, the real question becomes the sustainability of that growth to any outside shock to the economy. The consumer has already reached back to the credit bin to maintain current living standards and the impact from the rise in gasoline and energy prices are just beginning to work their way through the system. Of course, the shock that will most likely happen, like the Japan earthquake last year, is something that is not even on our radar.